Ages 5-7: Starting to Make Choices

Why give an allowance? At about age 5, most kids are ready to begin receiving an allowance—one of the most important tools for learning money management. With guidance, managing an allowance can prepare your child for having an adult income. Many experts believe an allowance should only as a means of teaching money management—not as a source of reward and punishment, or as a means of control.

The importance of choice. Most children will make mistakes. Spending the entire allowance the first day is typical. Let your child do it. But don’t bail him out. Instead, discuss how he may want to treat next week’s allowance.

How much allowance? Some parents base allowance on age: $5 per week for a 5-year-old, $6 for a 6-year-old and so on. Another method might be to decide what you expect your child to pay for and then adjust the allowance to that. Look at the current costs of the things kids typically buy. As your child grows older, gradually adjust the amount he receives by reviewing and revising items to be covered by the allowance.

Allowance, needs and wants. Help your child to begin distinguishing between needs—things we must have to live—and wants—things we would like to have. Learning this money management skill can save him from impulse buying and compulsive spending later in life. As he grows, it will allow her to develop judgment about how to control her spending.

Should a child earn an allowance? Parents think differently on this subject. Many reach a compromise, giving the child a base allowance whether he has earned it or not, continuing to expect the child to do basic household jobs as part of the family and paying extra money for larger chores. There are several advantages to this method. You avoid family clashes, in which the child says, “No, I’m not going to make my bed for that price,” or, “I don’t care about 9allowance. I don’t want to pick up my toys.” At the same time, the child learns that he can earn extra money and even negotiate the price for tasks like weeding the garden or dusting the furniture. Be realistic about how much the child can accomplish and how well he can do it. Match the job to the child’s ability and then give adequate compensation when the job is completed.

Saving:

Goal setting. Talk to your child about saving for something he truly wants and can save for in about a month. Show him how much he needs to save each week to meet his goal. Continue to attach a picture of the item to the savings jar to make the goal seem less abstract.

Interest. Start teaching your child about interest. For every dollar he saves, you can add a dime at the end of the month. (This, of course, is more interest than a savings account pays, but at this point you are simply getting across the idea that saving money can earn money.) Keep the dimes in a separate jar so the growth is visible.

Spending:

Learning to shop. If your child has and saves money, he’s ready to learn how to get the most value for that money. When you buy clothing, explain the importance of waiting for sales and selecting quality merchandise. Suggest that he do the same with toys. Ask him to compare the price and the quality of two toys, rather than just forking over his allowance.

Where money comes from. Remember the adage “Money doesn’t grow on trees?” Today, some children may be as unaware as we were about sources of money. For instance, some may believe that $20 bills just come out of machines, or that plastic cards are all you need to buy things. To give your child a more realistic picture:

• Before you go to the ATM, take him with you to the bank to make a deposit. Explain at the ATM that you’re simply using the money you’ve already put in the bank.
• When you pay with a credit card, explain that giving the clerk the card is permission to charge your credit card account the amount of the purchase. Be sure your child understands that you will have to pay the credit card bill at the end of the month.
• When you are paying bills, show him the credit card statement, saying something like, “Remember the T- shirt we bought for $10? Here it is on the list of things I have to pay for now.”

Paul Golden is the communications manager for the National Endowment for Financial Education (NEFE), a nonprofit foundation dedicated to improving the financial well being of all Americans.