Abcs Of Allowances

Your child has a much better chance of growing into
a financially responsible adult if you begin teaching him or her how to handle
money today.

The simplest way to introduce youngsters to numbers
is to have them count coins, crayons, toys, fingers, and toes, or any other object
that will hold their attention.

Once children feel comfortable with numbers, it’s time
to teach them how to use money to get things. Take your children along on shopping
trips and have them pay for small items, such as coloring books, candy, or toys,
from money you have given them for that purpose.

Allowance time

There’s general agreement that children should
have allowances. But should allowances be linked to doing specific chores around
the house?

While it is a personal decision, the concept of giving
an allowance and having additional “work income” usually is the best
concept.

If you make an allowance contingent upon household
chores, the child may start viewing the payment strictly as payment for a job.
For example, if your son or daughter gets a job helping a neighbor, he or she
may stop doing household chores, figuring it’s more fun next door than doing
the dishes or cleaning house.

An allowance should tell the child that the money
represents a specific share of the family’s income; household chores, on the
other hand, represent the child’s duty as a family member.

A child’s first year in school is about the time
he or she should begin receiving an allowance and with it an ongoing course
in how to spend, budget, and save money. Communicate with children, as they
grow, how you and your spouse handle money. For example, if you constantly use
credit cards instead of cash to pay for purchases, as your children get older,
they may feel they have the right to do the same without thinking about the
ultimate expense of the items purchased.

How much is enough?

A parent should consider the child’s routine
expenses, such as school lunches, and then include a little extra for some,
but not all, youthful diversions. There should be a clear understanding of what
is being paid out of the child’s allowance.

Designate a specific “allowance day” and
stick to it each week. Emphasize that it is their money to manage, and try not
to be concerned if all the money is spent the first day or two. Also resist
the temptation of lending money to your children when they deplete their allowance.

Whenever possible, keep the amount of the allowance
similar to that of friends. If you cannot give a comparable allowance, explain
why in simple, matter-of-fact terms and try to avoid feeling guilty. (Southern
teenagers receive between $30 and $38 a week, according to a survey by Ohio
State University.)

Emphasize savings

Think about opening a savings account for your
child by about the ninth birthday, and help him or her understand that money
in the bank will earn interest and grow.

When giving children an allowance, give the money
in denominations that encourage saving. For example, if the amount is $5, give
out five $1 bills and urge that at least one be set aside in savings. Some parents
offer to match what children save on their own.

Teach investing

When it comes to investing, youngsters may have
a harder time understanding the principles. Although minors technically can’t
make any investment decisions before age 18 in Kentucky, parents or grandparents
can buy securities or mutual funds for them under the Uniform Gift to Minors
Act.

Earnings of up to $1,500 in these accounts are taxed
at a very low rate; children age 14 or over are taxed at an 8 percent rate on
investments held at least five years, regardless of the amount.

Consider buying mutual funds that permit purchases
in flat dollar amounts. Or check out www.buyandhold.com,
which does the same for a minimum $20 investment.