Help Your Kids Buy Financial Savvy With Their Allowances

How much does it "pay" to be a kid? According to a new survey, quite a bit: an average of $16 a week, or $780 a year.

That's what the American Institute of CPAs discovered when they teamed up with Harris Interactive to explore the ways parents handle their children's allowances. But the study also showed that parents aren't using allowances to do the very thing they're meant accomplish -- to teach kids how to handle money.

If your child is getting an allowance, but not getting a financial education, here's how to begin correcting that:

Start With This Idea -- Money Is a Limited Resource: In my mind, the primary purpose of an allowance is to teach kids that money is a limited resource. Throughout your life, you will have a finite amount of money to work with -- whether it comes from a paycheck, a pension, a Social Security check, or some other source -- and you need to be able to manage that amount to cover your needs and build up a cushion for the future (i.e. savings). How well you do this dictates how much you'll have left over for the things you want. An allowance gives kids a way to replicate that process ... with training wheels. Except that most parents don't know how to handle allowances.

A Paycheck That Comes With a List: To do it right, parents need to take a look at the things each of their kids asks for money for right now -- be it snacks, Silly Bandz and Kooky Penz for the littler ones; or bigger snacks, iTunes downloads and nail polish for the older ones. Figure out how much you're already shelling out to each kid for these things, as well as any other categories you want to include (entertainment with friends, school store, gas, whatever) and add it up. That sum is a starting point for calculating allowance. Tell your kids what they'll be getting, and what they're now expected to pay for -- the items you'll no longer cover. And keep tabs.

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The Bank Is Closed, But Youngsters Can Still Work: After you give out the allowance for the week (and it is vital that you pay it in full and on time -- electronic transfers onto a debit card for teens can help parents manage this process), close the bank. The survey showed that parents who give allowance are also much more likely than other parents to shell out for other discretionary items like movie rentals and digital downloads. Don't.

If their allowance isn't enough for your kids to pay for the things they want to buy, they need to learn to reallocate their resources -- or they need to work. I don't mean working for the allowance. The survey showed that 89% of parents make their kids do chores for their allowance -- and 48% pay for good grades. I don't do either because I believe both are simply part of their responsibilities as a family member, though I've known parents who've had success with both. What I will do is pay for work I'd pay others to do. For example, if my high-school-aged son would stop home during his free period to walk the dog so I didn't have to pay the dog walker, I'd happily pay him instead.

Gross Up To Force Savings: Perhaps the most stunning piece of data from the research is that only 1% of parents say their child saves the allowance -- 1%! Our generation has more responsibility for our finances -- health care, retirement -- than our parents did. Chances are, our kids will have more responsibility than us. The only way for them to succeed is to learn to save. So, gross up the allowance by 10% and tell your kids that 10% must be saved for the long-term. Then check. (You can do this electronically by linking your kids accounts to your own -- which is how you facilitate online transfers in the first place -- then monitor the whole shebang online.)

Give Incentives for Other Goals: If you want your kids to donate part of their allowances to charity (something about one-quarter of kids do), make sure they have enough for that as well. And if they are trying to save for bigger purchases, consider implementing a matching program like employers do with 401(k)s that applies only to savings, to help them get there faster. If kids don't feel they're making progress, they'll give up, and that's completely counterproductive.

Finally, Maintain A Running Dialogue: According to the research, we're more likely to talk with our kids about good manners, shunning tobacco, eating well, and the dangers of drugs and drinking than we are to talk to them about money. You need to do all of the above -- even if you don't feel like you're under financial pressure yourself. Interestingly, parents who didn't graduate from college were significantly more likely to talk money with their kids than were college grads. The survey didn't ask why, but I suspect it's that resources are tighter in the homes of non-college grads. Those parents need their kids to be with the program in order to keep the family finances in line. And their kids will be better off in the long run.

-- With Maggie McGrath