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If you have already decided to stop spoiling your kids, then it's time to start teaching the lessons of financial responsibility with step 2 of Jean Chatzky's 6 Steps to Raising Money-Savvy Kids.
Let me just say, off the bat, that there are some people who don't believe in allowances. I am not one of them. I was given an allowance as a child. I give an allowance as a parent. I have seen an allowance system work. And I am a fan.
That said, there are many parents who don't manage allowances effectively. The goal of an allowance—in my mind—is two-fold. First, it reinforces the lesson to kids that all money—not just yours but theirs as well—is limited and they will be best off if they learn to put a little thought into how they use it. And second, but no less important (if you've ever walked through a store with your child, I think you'll agree), it is your escape from the "I wannas." Once you give an allowance, you can tell your children as you head to the store to bring their own money if they want to buy anything. When they ask for this or that, you can say, "If you want it, you can buy it with your own money." Believe me, their money is much more precious than your money. They will think long and hard. And as long as you resist the urge to dig into your own stash, the "I wannas" will begin to disappear. Here's how to make my allowance system work for you:
Start when school starts
Kindergarten or first grade is the right time to start an allowance. By this time, your child may have a school store to visit where he or she can buy pencils or other supplies. If not, chances are he or she will have plenty of exposure—through you—to other places to shop. Grocery stores, drug stores, dollar stores...all are full of things your child will be able to afford.
Here's where you likely wonder: "Should I tie the allowance to good grades or doing chores?" My feeling is no for two reasons. One, I believe it's the child's responsibility to do his or her best in school and to help around the house. School is their job just like work or running a household (or both) is yours. And two, if you make one contingent on the other, you're taking the chance that your child will choose to forego the cash in favor of not emptying the dishwasher or walking the dog. And you want them to have the money so that they'll learn how to manage it.