Setting an Allowance for Your Kids Gives Them More Than Just Money

One of my neighbors refuses to give his kids an allowance, not wanting to give “money for nothing.”

My boss gives his kids an allowance that is tied to doing chores; no work, no pay.

My 5- and 7-year-old girls get a small allowance each week, money that is not tied to particular chores.

All of us believe that what we are doing is right.

In truth, there is no single right way to give an allowance--or offer the chance to earn money doing chores at home--but there are plenty of things parents can do to help their children swallow that first taste of money management.

Because the habits formed during childhood often shape attitudes about money for a lifetime, it is important to look at all sides of the allowance issue and decide which one does right by your children.

The allowance question revolves around several key decisions, notably whether to pay, what to pay for, when to start and how much to pay. Here’s a look at each of those issues:

* Should parents give an allowance?

The crux of the issue starts with your own philosophy. Most parents have ambivalent feelings about money in general, and allowances in particular, and aren’t sure what to do.

I asked my friend who refuses to give money for nothing what happens if his kids ask him to buy baseball cards or pay for a movie.

“I give them a few bucks if they need it,” he said.

To my way of thinking, that’s money for nothing.

In that kind of situation, kids get their money in dribs and drabs. They learn that money comes from a machine at the bank--a bottomless fountain of cash with you as the conduit. There’s not much opportunity to think about the importance of spending, saving and budgeting.

“So long as you are doling out the money, they will spend as much as you give them,” says Janet Bodnar, senior editor at Kiplinger’s Personal Finance and author of “‘Dr. Tightwad’s Money-Smart Kids.” “But if you give them their money for the week and tell them, ‘This is what you have to spend,’ they instantly become more stingy. It’s like magic, a charm that makes them willing to work, willing to put off buying something, and it avoids having them nickel-and-dime you to death.”

If you still don’t want to simply give an allowance, the next option would be to tie some level of compensation to chores, which leads to the next question.

* What are you paying for?

If you do not tie the allowance to chores, as in my household, then you are essentially working on the principle of “substitution.” The allowance functions as a substitute for something the parent might otherwise buy the child, with the child then making the spending decision.

Say you normally pay for the child to play a video game when you go to a certain restaurant. The allowance is there to take care of that. The child quickly learns that he or she has a limited quantity of money and that spending it frivolously will result in frustration the next time there is something to buy.

This is no free ride, in that my kids are expected to do their household chores (which are minimal at their age, but which will increase over time).

But, as in the case of my boss, an allowance can be tied to specific jobs. Neale S. Godfrey, chairwoman of Children’s Financial Network and author of “A Penny Saved,” a guide to teaching children values and life skills, notes that her kids “have to keep their rooms clean and free of breeding diseases and don’t get paid for that but, instead, get paid for doing specific chores. This way they learn the value of working and find out that there is no entitlement when it comes to money.”

Paying for chores does have its drawbacks. For starters, you can expect some future request for, say, help bringing in the groceries to be met with “How much will you pay me?” Moreover, you must ride herd on the kids and make sure the work gets done. The more complicated the system you install, notes Bodnar, the more work it is to maintain it.

You still get the substitution effect. As my boss notes, when his son wants baseball cards, the answer is “Do you have enough money to buy them?”

The difference between “paying for chores” and “giving an allowance” in many cases is little more than semantics, designed to appeal to the mind-set of the parent.

Many families combine allowances with for-pay chores that are above-and-beyond the routine. The idea here is that when the kids are old enough to handle a certain job, like cutting the grass, they take on the responsibility and get paid for it.

* When to start?

Because the biggest benefit to an allowance may be starting discussions about money, there’s no wrong time to start. The best opportunity to make a lasting impression, however, is to begin before kids have a chance to develop poor spending habits.

A 1994 study by Lutheran Brotherhood noted that 90% of Americans believe children deserve an allowance. A more recent study by Zillions magazine showed that just less than half of all children ages 9 to 14 actually get one.

Ironically, the total income of that group--including allowance, extra money from chores, gifts and other sources of money--was shown to be about the same as the income of kids who rely on handouts from Mom and Dad.

Kids start to have regular opportunities to spend money around the time they go to kindergarten, which is why most experts suggest you start no later than age 6.

Regardless of a child’s age, lay out the rules--when they get paid, how much, what work they must do and what can earn extra, when they can expect increases and what the money is to be spent on--and stick to them.

* How much to pay?

This is a question of means and attitudes. Several experts suggest a weekly guideline of $1 for every year in the child’s age. That sounds steep to me (when my daughters are 15 and 17, for example, that’s $32 a week and more than $1,500 per year), but it’s not that much if the money comes with strings attached. (For now, my children’s weekly take is one quarter per birthday.)

If, for example, you make the kid divide the money into separate pots, he or she finds out quickly what disposable income is all about. There are four logical divisions you can make with a child’s money: long-term savings and/or investing, mid-range goals, instant gratification and charitable contributions.

If one-third of the money goes to the investing piggy bank and a bit more goes to charity, the actual spending money you have given the child is more reasonable.

Generally, allowances increase with age, as the child’s needs for money (and ability to do more around the house) increase.

Says Bodnar: “I would never give a 6-year-old $10 per week in allowance, but I might give that to a 14-year-old--especially if he is responsible for paying for his own snacks. The amount of money is not as important as the lessons it teaches. The idea is to transfer responsibility to your kids. If whatever system you use does that, no matter how it’s set up, then you have done things the right way and given your kids more than just money.”

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Charles A. Jaffe is personal finance columnist at the Boston Globe. He can be reached by e-mail at jaffe@globe.com or at the Boston Globe, P.O. Box 2378, Boston, MA 02107-2378.