Money Management and Allowance
If we asked ten different parents their views on allowance, the results would be half saying “yes” and the other half saying “no” to allowance. We would also receive ten different answers to the difficult question of how much you should pay for allowance? We believe that children should receive an allowance.
There are many reasons to giving an allowance and the most important one is that it provides an opportunity for children to learn how to manage money. The sooner they learn how to handle their own money, the better. Handling money effectively is a life skill that is necessary and we as parents can provide this gift.
Carl sees a remote control car and he loves cars. “Dad please buy this for me, please.” Does Carl really care or know how much the car costs? Now, if Dad says, “Carl, you may have the car, use the money from your allowance to buy the car.” Now the cost of the car comes into play. Many times what happens is that it is okay for Dad to buy it, but if the child has to use his money then forget it.
This is a great time to talk about goal setting and saving your money for something you really want. Both are necessary life skills we would want to teach our children. Many times it will show how truly important the item is to the child. Just imagine a child buys an item and it breaks. What a great lesson to learn first hand. How many times have we bought something and it turned out to be a waste of our own money? If this happens with your child spending his or her own money, then it will be a great lesson compared to us spending our money to buy the item for him.
One solution for handling money is to have our kids divide their allowance in half. Fifty percent goes into a saving bank and fifty percent goes into a spending bank. Many people suggest dividing the allowance into thirds with the third part designated for a charity. With the spending portion, they should be able to spend it as they like.
Deciding on how much allowance to give is not an easy question. This is a question without a correct answer. I have seen middle school students receive anywhere from zero to seventy dollars per week (no this is not a misprint, it says seventy). Many parents believe you should pay a dollar for each year of their age. A ten-year-old would then receive ten dollars. However, this really depends on your budget and your beliefs. Make sure that when you give your child allowance it is in a way that can easily be divided into halves or thirds.
A Child's Thoughts On Money
What happens when parents pay:
We never run out of money. It is limitless.
They may value gifts less.
They develop the “Gimme” or “I have to have” attitude.
There is a lack of motivation to work for a goal.
What happens if the child pays:
He has to limit his spending or he’ll run out of money.
He learns to value quality.
He will receive practice on making decisions.
He learns to work towards a goal.
He will increase the his self-esteem.
The child becomes motivated to work for their desires.
The child will take better care of an object that he pays for.
Building your child's financial IQ about credit cards
If your child is heading off to college soon, be prepared for him/her to get numerous credit card applications. In every bag when he/she buys an item at the bookstore will be credit applications. They will not need your approval if they’re over the age of 17. Here are some tips when it comes to credit cards that can be very helpful. If your child is still in middle or high school use these tips as a teaching lesson. Educating our children about finances gives them a life skill.
1. Everyone needs to understand that a bad credit history makes it harder to get a loan, buy a car, and it can effect your chances of getting a job.
2. Pay off the balance every month. If you only make the minimum monthly payment on a $2000 balance, then it will take 18 years to pay it off including the $2,615 in interest.
3. Make your payment on time. The banks are allowed to increase your interest rate because of a late payment. Also, be aware that banks have been changing due dates from month to month. We need to watch the due dates closely.
4. Never take cash advances. There is no grace period on cash advances therefore interest starts immediately. These are expensive.
5. Shop around for credit cards and use the annual percentage rate (APR) for comparison. Do not go by the introductory rate, this rate may go way up in three months.
6. It is very important to understand what the grace period means. This is the interest free time between a purchase and the billing date. It is usually between 25 and 30 days.
7. When your friendly bank sends you checks to write against your credit card, shred them. If you read the fine print you'll realize these are EXTREMELY expensive.
These are life lessons we can teach resulting in our children having control over their credit cards instead of the other way around.
Here are a few more money topics to look into and to discuss with your children:
1. Shred documents that have personal information on them.
2. Do not skip a payment when the bank offers you a “holiday.” Interest still accumulates.
3. Extended warranties are not needed at the retail store. They hard sell these because they’re very profitable.
4. No payment and no interest for two years. If the item is not paid in full then you will owe interest from the date of purchase.
5. Gift certificates are nice if they’re used. Many of these cards have expiration dates and over time some lose their value. That $50 card may wind up being worth $30 by the time you use it.
6. When your child graduates high school he/she may no longer be covered by your health insurance. If he/she is a full time college student they might be covered until they graduate or their 23rd birthday. Contact your health insurance provider for their rules and policies.
7. High interest rates equals high risk.
“There are people who have money and people who are rich.”
~Coco Chanel~
Derek is a parent coach, author, and speaker who has customized programs
for corporations, schools, and parent groups for putting the fun back into
parenting and protecting your child/student from bullying. Derek has authored six books. He can be reached at 847-853-4308 Derek@randelconsulting.com.
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