Many children first learn the value of money by receiving an allowance. The
purpose is to let children learn from experience at an age when financial
mistakes are not very costly.
The amount of money that parents give to their
children to spend as they wish differs from family to family. Timing is another
consideration. Some children get a weekly allowance. Others get a monthly
allowance.
In any case, parents should make clear what, if anything, the
child is expected to pay for with the money.
The object is to show young
people that a budget demands choices between spending and saving. Older children
may be responsible enough to save money for larger costs, like clothing or
electronics, of course it’s too far away to buy a .
Many people who have written on the subject of allowances say
it is not a good idea to pay your child for work around the home. These jobs are
a normal part of family life.
Paying children to do extra work around the
house, however, can be useful. It can even provide an understanding of how a
business works.
Allowances give children a chance to experience the things
they can do with money. They can share it in the form of gifts or giving to a
good cause. They can spend it by buying things they want. Or they can save and
maybe even invest it.
Saving helps children understand that costly goals
require sacrifice: you have to cut costs and plan for the future.
Requiring
children to save part of their allowance can also open the door to future saving
and investing. Many banks offer services to help children and teenagers learn
about personal finance.
A savings account is an excellent way to learn about
the power of compound interest.
Compounding works by paying interest on
interest. So, for example, one dollar invested at two percent interest for two
years will earn two cents in the first year. The second year, the money will
earn two percent of one dollar and two cents, and so on.
That may not seem
like a lot. But over time it adds up.
