How to Teach Kids About Money: Allowance and Spending Decisions

| July 17, 2014
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By Michael Leanza, CFP®

Last week we set the foundation for teaching kids about money.  With those basic steps in mind, we’ll now talk about the allowance and spending decisions you may choose to share with your children.

When giving children an allowance, give them the money in denominations that encourage 
If the amount is $5, give them five single dollar bills and encourage that at least one dollar be set aside in savings. 

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 which only cost one-half their face value and earn interest that can be tax-free if used for a college education. 

Keep good records of money saved, invested, or spent 
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. 

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, make unit-price comparisons, check for value, quality, repair ability, warranty and other consumer concerns. 

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. 

In next week’s final post, we’ll cap off our How to Teach Kids About Money series by looking into the importance of “buying smart.”

Source: Brought to you by National PTA® by Paul Richard 
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. 

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