Kids and Money:
Allowance and Spending Decisions

by FamilyEducation Staff

Brought to you by National PTA®

by Paul Richard

Money gives people -- both young and old -- decision-making opportunities. Educating, motivating, and empowering children to become regular savers and investors will enable them to keep more of the money they earn and do more with the money they spend. Everyday spending decisions can have a far more negative impact on children's financial futures than any investment decisions they may ever make. Here are 5 tips on using allowance and daily spending to get kids started on the road to financial responsibility:

1. When giving children an allowance, give them the money in denominations that encourage saving. If the amount is $5, give them 5-1-dollar bills and encourage that at least one dollar be set aside in savings. (Saving $5 a week at 6 percent interest compounded quarterly will total about $266 after a year, $1,503 after 5 years, and $3,527 after 10 years!)
   Q: How much weekly allowance does your child get?

   Less than $2.

   $2 - $5.

   $6 - $10.

   $11 - $20.

   $21+.

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2. Take children to a credit union or bank to open their own savings accounts. Beginning the regular savings habit early is one of the keys to savings success. Remember, don't refuse them when they want to withdraw a portion of their savings for a purchase--This may discourage them from saving at all. You can also introduce children to U.S. savings bonds. Bonds are still a good value, costing one-half their face value and earning interest that in some instances will be tax-free if used for a college education. Perhaps more importantly, when given as a gift, bonds will not be spent immediately, reinforcing saving and goal-setting lessons.

3. Keeping good records of money saved, invested, or spent is another important skill young people must learn. To make it easy, use 12 envelopes, 1 for each month, with a larger envelope to hold all the envelopes for the year. Establish this system for each child. Encourage children to place receipts from all purchases in the envelopes and keep notes on what they do with their money.

4. Use regular shopping trips as opportunities to teach children the value of money. Going to the grocery store is often a child's first spending experience. About a third of our take-home pay is spent on grocery and household items. Spending smarter at the grocery store (using coupons, shopping sales, comparing unit prices) can save more than $1,800 a year for a family of four. To help young people understand this lesson, demonstrate how to plan economical meals, avoid waste, and use leftovers efficiently. When you take children to other kinds of stores, explain how to plan purchases in advance and make unit-price comparisons. Show them how to check for value, quality, repairability, warranty, and other consumer concerns. Spending money can be fun and very productive when spending is well-planned. Unplanned spending, as a rule, usually results in 20-30 percent of our money being wasted because we obtain poor value with our purchases.

5. Allow young people to make spending decisions. Whether good or poor, they will learn from their spending choices. You can then initiate an open discussion of spending pros and cons before more spending takes place. Encourage them to use common sense when buying. This means doing research before making major purchases, waiting for the right time to buy, and using the "spending-by-choice" technique. This technique involves selecting at least three other things the money could be spent on setting aside money for one of the items, and then making a choice of which item to purchase.

Adapted from "Dollars and Sense," in the April 1999 issue of Our Children, the official magazine of the National PTA®.

Paul Richard is executive vice president of the National Center for Finance Education (NCFE), a nonprofit organization dedicated to helping people learn to manage money.