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Lessons in money management should start at a young age and an allowance is one of the first tools we can use to teach children how to manage money. These early lessons pave the way for a solid foundation in the important world of personal finances.

Kids by nature get comfortable with Mom and Dad footing the bill for everything from clothes, vacations, toys, and even the impulse buys at the checkout counter of the grocery store. When parents agree to splurge, kids learn to ask for more. However, that kind of thinking can be halted at a young age when an allowance comes into play. Many parents resist the notion of allowances or incorporate them in a way that soon becomes ineffective.

So how can you effectively teach a child to handle their own money?

When Is the Right Time?

Experts and parents often squabble about the appropriate age to start giving allowances. Essentially, when a child is of the age where they begin asking for material things, it’s time to start an allowance. Waiting until a child is a ‘tween’ (9-12) or a teenager can often be too late for effective learning. Older kids may have already been heavily influenced by wants and will resist parental notions of an allowance. Starting with a younger child who is capable of understanding the basics of counting money (around age 4), there may be a higher success rate during the institution of an allowance that carries on to later years.

How Much to Give?

Different families will view the amount of an allowance differently using criteria such as age, chores being done, or what other friends and family give to their own kids. Financial experts feel it is entirely appropriate to provide a weekly allowance equaling one dollar for each year of the child’s age. As kids age, their spending amounts will increase so this method may be the way to remain consistent while meeting the demands of growing children.

How To Distribute?

Many parents will tie an allowance in with chores as their own parents have done. However, child development experts say this may not be the best method for money lessons. By keeping allowances and chores separate, your child can learn two lessons: one about financial management and another about personal responsibility within the family. Parents may also wish to pay for special jobs that get completed such as cleaning out the garage or washing the car. Jobs outside of the normal responsibility can help reinforce the value of good work.

How To Spend?

By rights the money given in an allowance should be spent per the child’s wishes. However, to instill good financial sense, parents should work with kids to understand spending and saving. Allot a percentage of the money to be spent as a child wishes but require that a percentage also go towards savings.

Deciding Spending Limits

Parents should discuss their expectations with their children when it comes to spending allowance money. After the prerequisite percentage is put into savings, the remaining amount should be spent within those expectations. Parents and kids should come up with a list of things kids must use their own money for each week. For instance, decide who is now responsible for paying for a night at the movies, gifts for friends, luxury clothing, toys, and other entertainment. Kids can learn the importance of avoiding impulse buys rather quickly when they realize an overpriced video game means they will not be able to go to the mall on Saturday night.

Again, families’ views on allowance will vary greatly but one thing is certain – the earlier kids learn and the more parents are involved in money lessons, the more likely kids will grow up with a healthy view of money and be able to manage their own personal finances throughout life.