Parents often put their own financial struggles upon their kids in a way that paints a negative connotation about money. Step one of being able to teach kids about money is to first manage your own affairs well, in terms of keeping debts in check, paying bills on time, and saving effectively for long term goals. Thereafter, an allowance is usually the best place to start educating children; by throwing them in the trenches with their own money, you empower and nurture independence within kids. At what age should you start giving kids an allowance? It depends on their maturity and intelligence levels, although sometime between the ages of 8-10 is usually appropriate. Ask yourself these questions to determine whether or not your child is ready to accept responsibility for an allowance:
1. Does the child comprehend basic arithmetic (addition, subtraction, division, multiplication)?
2. Can the child estimate the cost of at least some household items, groceries, or toys, like a can of soda, paper towels, or video games?
3. Does the child have the basic capacity to delay gratification if reasoned with? (i.e. if you tell the child not to eat candy until after dinner and then leave them in a room alone, would they resist the temptation?)
If your answer is "Yes" to all three of these questions, then your child is ready to receive an allowance. How much they receive is a reflection of what basic expenses you will expect them to cover with these funds, as well as how much they can reasonably save or spend on discretionary items, like toys and candy. Sit down with your finances and figure out how much money you spend per child per month on items such as books, video games, school supplies, haircuts, and movies. Then, put this money in their hands and let them manage their own affairs. Mind you that they will not always make the right decisions, but that is part of the learning process.
There is a big debate in the field of Child Psychology as to whether it is useful to base children's allowances on their performance in school or other behavioral factors, like doing their chores well and displaying sportsmanship in their activities. Many say that financial punishment and reward based on such factors ruins the morale of kids, and that positive and negative reinforcement through parental feedback is superior. Frankly, we disagree. To yell at, ignore or lecture your kids when they get bad grades is both more damaging and less effective than to simply reduce one's allowance or withhold a reward of some kind. The 401kid perspective is that, first of all, children like all people, fall into different categories and therefore, will be responsive to different types of feedback. Therefore, a basic allowance that will cover basic necessities, should always hold. However, for the perks, like video games and other leisurely activities, we believe that parents should us!
Use good judgment to structure a reward system that fosters accomplishment, independence and compassion. Working interactively with your kids to establish realistic goals and accompanying rewards, which include college savings dollars and charitable contributions in their names, is one of the keys to the development of personal, fiscal and social responsibility.