Should an allowance be divided into spending, saving, and giving categories?

It’s not carved in stone, but it could be an excellent opportunity for your child to learn the importance and consequences of how they spend their money, the gratification of saving their money, and the benefits of giving to others who are in need.

When it comes to determining the specifics, should you provide the guidelines or allow your child to determine the division of their money, or even how they can spend it? Like all things in life, some ‘read the small print clauses’ can be included in your allowance agreement, but it is important not forget that this experience is to allow your children to practice making financial decisions with their money.

So if a mistake is made, the cost will be nominal, yet still real enough to teach them the lessons they will need as adults: saving money; prioritizing goals; discovering the difference between impulse buying and delayed gratification; experiencing the heartfelt satisfaction of giving to others; the pride of earning money for a job well done; and learning that wanting something and needing something isn’t the same thing.

Should you allow your child to borrow against their allowance for something they just have to have?

This could be a great financial lesson for your child, but having some terms in place for the short-term loan may in order: have them sign the receipt (for the amnesia that may develop); don’t give them the item they have borrowed money to buy until they give you the money owed; if they don’t have enough to pay you back, hold onto the item until they have saved up enough to do so; and if the money isn’t forthcoming as agreed, the next payday give them a bill for the item.

A cash advance is much the same, if you decide this is okay, get an IOU. If necessary (you know your child best) ask for collateral up front, an item that is important to the child that they will want back. And, of course, there is always the age-old option of saying no.

Should I give a cash bonus for kudos? Or penalties for undone chores?

Everyone loves a cash bonus for doing a great job, so why not the occasional cash bonus for your kids?

On the flip side, what happens when a child fails to complete their chores? The whole idea of assigning chores is to teach a child responsibility. So, a penalty for slackers may be in order, whether that’s cutting TV or computer time or not giving them something they really want. Or, what about your child paying a cash penalty when they fail to follow through, just like in the real world? Nothing hurts worse than giving up hard cash, for adults or children alike.

Use allowances as tools for teaching financial lessons

Allowances should be used to teach children about money. If your child is always pestering you for a raise or an advance, think of the negotiating aptitude they are learning and not how annoying it is. Instead of grimacing, engage them with terms of this new agreement and hash out the specifics of what the contract will cover, and what it will not. In other words, make it a fruitful negotiation for both parties.

It’s no longer just a matter of putting money in their piggy bank, it’s a digital age. Even the ol’ piggy bank has been updated with separate compartments for different expenses. Consider matching grants to reward your child’s savings discipline — who doesn’t love an employer-matched 401K? For younger children, be sure and count the money with them periodically and tell them how close they are to their goal. For older children, open a bank account where they can earn interest, and when they are old enough, a checking account.

Being a good role model will help your children to develop the financial competence they will need as adults. Be inventive, sensible, and caring. Putting in some time and effort now will give them a strong foundation that will pay back lifelong benefits.