University of Wisconsin - Extension

Madison - Children today receive more money at younger ages than in the past, but how do they learn critical money management skills?

"Parents have opportunities every day to teach their children valuable lessons about handling money," says Linda Boelter, Family Financial Management Specialist with University of Wisconsin-Extension.

"But first you need to think about your own feelings, behaviors and values about money," suggests Boelter. "Remember, children learn not just from what you say, but also by what you do."

"Children are great observers," Boelter says, "so their financial education really begins when they are seated in the grocery store cart."

Starting as early as three or four, children become aware of money and that it can be exchanged for goods. Make believe activities like playing store, restaurant, post office, bank, or gas station give children an opportunity to act out what they observe. Preschoolers can learn the names of coins, how to count, and the values of different coins. They can learn simple decision-making skills by making choices in the context of daily activities. For example, giving them some coins to spend at the supermarket teaches them about spending decisions. Make sure your children understand that spending must be limited to the coin at hand. This teaches them that people do not always have enough money to buy what they wantÿ�Ã-��Ã-��an important life lesson.

Allowances are an effective way to give children experience in managing money. By the age of six or eight, most children are ready for an allowance. Instead of getting money "on demand" whenever they need it, a regular allowance teaches children to anticipate spending needs and plan ahead.

Allowances should be paid at regular intervals, usually once a week, especially for younger children. The amount depends on what the allowance is to cover, some money for discretionary spending like entertainment or treats, plus some money for saving. It should be small enough to require choices, but large enough to allow for choices.

Establish ground rules so your child knows what he or she is expected to pay for with the allowance, for example school lunches.

"Some parents make it a requirement that a certain amount be saved, but this 'forced savings' takes that control away from the child and doesn't always teach them how or why to save," Boelter explained.

"It's also not a good idea to tie allowances to good behavior or good grades. Doing so tends to leave children viewing the allowance (or money) as a bribe or punishment. It can give money an inappropriate emotional or moral significance."

A more controversial topic is tying allowances to chores, according to Boelter. "While on one hand it can convey the idea that the child actually works to earn the money, on other hand, it can result in situations where you are forced to 'dock' their allowance when chores aren't done. That becomes a punishment, not a money management lesson."

Boelter suggests the approach of linking the allowance to spending responsibilities, not chores. If your children want to supplement their allowance with additional income, give them the chance to earn money by doing additional tasks above and beyond the chores they do as their contribution to the family.