Young girl putting money in a piggy bank
Photo: Polka Dot/Thinkstock
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.

How much is the right amount?
I'd encourage you to take the pulse of your friends and neighbors to see how much they're giving. You don't want your child to receive much more or much less than his or her peers. You could also resort to national averages, which start at about $1 a week in kindergarten and go up $1 for each year in school. But the best way to determine how much money you'll give your child each week is to decide what you expect that money to cover. Make a list, figure out how much those items cost and then present it—as a fait accompli—to your kids.

Use this easy tool to help you complete your list:

Of course, the list should be simple in grade school and get more complicated as your children get older. I started with Cheese Doodles and other chip-like foods. My kids loved them. I refused to buy them. But they were available in the school lunchroom. So I told them if they wanted them, they could buy them from their own money. Slowly, I added onto the list: candy from the newsstand next to the diner where we sometimes ate lunch, the first trip to the ice cream man each week would be on me but after that on them. As they got older: baseball cards, Webkins (is anyone as tired of these as I am?), admission to the movies or the ice skating rink, presents for their siblings and parents.

Just for fun, put yourself in your child's place. Do you remember how much allowance you received growing up? Compare what you made back then to what you would make now.

Get ready to negotiate
There may come a time when your child asks for more. It's up to you to evaluate the request and decide if you'll ante up. But be reasonable. If you expect your child to pay for his or her own movie ticket and they cross the age-threshold that forces them to buy an adult ticket, you may have to come up with a few extra dollars each week. But make sure that your child provides you with a reasoned argument. "Because I need more" simply doesn't cut it. You're teaching your children skills that will come in very handy the first time they ask for a raise at work.

Help them earn more
What if what your child wants is a $90 pair of sneakers or a $150 MP3 player? On a $10 a week allowance? I'm a firm believer in delayed gratification. Things mean more when you have to wait for them. But to a child, waiting nine weeks for the sneakers may simply be impossible—it may be too long a period of time. And you don't want them giving up on their quest. You want them to succeed. Only by saving for something that he or she really wants and then achieving their goal will they learn that a) they can do it and b) it was worth it.

So, I'd suggest helping your children in one of two ways. You can start a mini 401(k) at home and match each dollar saved with another of your own. That will help your child reach the goal faster and lower the odds of quitting. Or, you can offer extra jobs for extra work. My friend Diane keeps a list of jobs with the price she'll pay for completion on her refrigerator. Just be sure, if you do go the job route, that you pace your offerings. You don't want to make the payoff to quick. You're grooming a saver. And by doing so, you're helping your child get started with Step Three.

Teach them to budget
Once your children get good at managing smaller amounts of money, you'll want to teach them how to stretch a larger amount over either a longer period of time or more tasks. The first time I had to do this was when I earned my spending money for my first year of college the summer before, then had to make it last two semesters. I blew it—and during Christmas vacation found myself at the sporting goods store where I'd worked in high school begging for a few hours. Susan Beacham, founder of the Chicago-based financial education company Money Savvy Generation, once explained to me that she taught these lessons to her daughters while they were still in high school. How? She gave them each a budget for school clothes, had them each make a list of the things they needed and hauled them to the mall. Then she sat there, patiently, as they discovered on their own that you could buy four shirts at a discounter for the price of one in a department store.

Now that your child has some income, make saving and investing a habit with Step 3!

Get all the steps to raising money-savvy kids


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