It's a good idea to start teaching kids early about how to handle their own money. Consider setting an allowance so they can start to experience the importance of financial planning and responsibility.
1. Determine the Right Amount
First, you'll need to figure out how much to give your child and how often you will pay them. Many parents pay their kid once a week, though the amount will likely be determined by a variety of factors, such as the parents' income and budget, the child's responsibilities, age, etc. Parents need to decide what the right amount is for their own family, but try to be fair and remember what it's like to be a kid and dependent on others for everything in your life. Consider their behavior, work ethic, interests, and needs.
2. Make Sure They're Earning Their Money
There is some debate about tying allowance to household chores, and it is generally accepted that it's best for a child to earn the money they get. This can help build their work ethic and prepare them for the importance of having a job as they get older. It teaches responsibility and how compensation works. If you give them a regular amount of money each week, and they haven't done anything to justify being compensated, it's not a great precedent to set.
3. Pay Regularly and Consistently
Assuming that obligations are met, and unavoidable financial strains aren't part of the equation, pay your child regularly and consistently on the same day each week or whatever the decided time period is, and pay the same amount. This shows that you are taking the payor/payee relationship as seriously as you'd like them to take it. It is important to teach them that they have the right to receive what they worked for. If they hold up their end of the bargain, you hold up your end.
4. Talk About Budgeting and Savings
As your kids earn money, they should think about the importance of budgeting. Talk to them about what they want to do with their money and emphasize the importance of saving. Consider setting them up their own savings account to help with this. Make sure they understand that when they spend what they have, that's all there is until they get paid again. Talk about prioritizing and how to pay for the things they want. Remind them that you're not going to buy them everything they want and that they'll have to pay for some things themselves if they wish to have them.
5. Hold Them Accountable for Their Spending
As they earn and learn about budgeting, it's important to hold your kids accountable for their spending. If you've already explained that you won't be buying certain things for them with your own money, stick to it. Don't allow them to spend their allowance and then still buy them the very things you said they would have to buy on their own. They need to learn that when their money runs out, they'll have to wait until they earn more before they can get the things they want.
6. Provide Extra Earning Opportunities
That's not to say that you can't give them extra opportunities to earn money. If they're willing to work for more money, consider giving them extra chores. Showing that the harder they work, the further ahead they can get, is not a bad lesson to teach. Make sure they understand that this isn't a regular part of their allowance and that they shouldn't expect this extra sum every pay period. At the same time, reward a job well done and show that you appreciate the effort they've put in.
7. Avoid Using Credit for Allowance
Stick with cash or withdrawals from your checking account to pay your kids their allowance. Don't tap into savings or your credit cards. These days, it's very possible your kids will want to buy things online or even be paid in virtual currencies tied to video games they like to play, so using credit to pay them is indeed easy. However, remember to be responsible with your own finances and avoid paying interest on your kids’ allowance by sticking to the money you actually have for your household "payroll."
Allowance habits aren't going to be the same for every family, but, hopefully with these tips, kids will get a head start in the finance department. Set an allowance and take it seriously to get an early start on teaching your kids about how money works.