Nickels and Dimes
Although hard data about allowances, children and attitudes toward money are scarce, these issues are clearly on our minds as parents. The December 2000 U.S. Trust Survey of Affluent Americans reflects a widespread fear: that our children will grow up naive about the value of money and the effort required to earn it, and so will spend beyond their means. “How children handle money is a very valid concern that requires hands-on experience,” notes Michael J.A. Smith, managing director at Deutsche Bank Private Wealth Management. “It should be methodically addressed through education, communication and conversation about how to save, how to keep track of what you spend, and how to build and live within a budget.”

TOP VIEW When we establish our children’s allowances, we have a unique opportunity to foster their financial independence while teaching skills such as budgeting and investing. To make the most of this, some of us take a three-pronged approach, earmarking one-third of the allowance for spending, one-third for saving and one-third for charitable giving.

There are no hard and fast rules about when to start giving an allowance or, for that matter, how much. Some experts maintain that earlier is better—as soon as a child can distinguish between nickels, dimes and quarters, which can be as young as 3 or 4. Charles Collier, senior philanthropic advisor at Harvard University and author of Wealth in Families, offers this counsel: “Based on my work among wealthy families, I’ve concluded that it is very important to give an allowance as early as ages 7 or 8. It’s a critical educational experience for a child to understand about spending, saving and losing money.”

Psychotherapist Eileen Gallo, author of Silver Spoon Kids: How Successful Parents Raise Responsible Kids, and her husband, Jon, who founded a wealth-counseling firm in Los Angeles called the Gallo Institute, are hard-liners when it comes to allowances: All children should get one with no strings attached. An allowance, says Eileen Gallo, represents a sharing of family resources. Chores, such as making beds, room-straightening and feeding the hamster, should be uncompensated duties, part of sharing of family responsibilities, and should not be linked to an allowance. An allowance, she explains, should not be viewed by us as a form of compensation or as punishment, but rather recognized as a golden opportunity for teaching the values and uses of money.

The Gallos also warn against tying allowances to grades or behavior modification. Advises Jon Gallo: “We tried it with our own children. It doesn’t work.” The reason, he says, is that this practice externalizes motivation that should be intrinsic. Gallo backs his assertion up with a study from the Partnership for Learning that ranks “paying for grades” in the lower half of the 10 primary motivators among schoolchildren in sixth through 12th grades.

Allowances can help a child with seemingly unlimited resources start to understand that money does not, in fact, sprout from nowhere.

Knowing who your children are and how much responsibility they can handle is imperative when setting up an allowance plan. “What can your child manage developmentally?” is the first question Judy Barber of San Francisco-based Family Money Consultants asks couples who seek her advice on this topic. As children mature, they become more competent at handling abstract concepts. For example, it is reasonable to provide your daughter with a quarterly stipend and to expect her to file monthly reports and write her own rent checks as she heads off to Wharton to major in accounting. However, for another child, one who might be a spendthrift, this burden can be overwhelming.

Seizing opportunities for reality lessons is also important. Notes Barber, “An allowance permits a child to make errors appropriate for his or her age. If a 10-year-old blows his allowance and can’t go to the movies, that’s a good life lesson. If your 19-year-old blows her college tuition, it’s a much more serious matter.”

Allowances can help a child with seemingly unlimited resources begin to understand that money does not, in fact, sprout from nowhere. Barber cites parents who purchased a car for their 16-year-old, but required that the child chip in for the insurance. Other parents have found that asking their children to be responsible for cell phone bills helps keep conversations—and bills—to a reasonable minimum.

The Tripartite Method
Jilliene Schenkel, a philanthropic consultant, is among those who advocate the “tripartite” allowance system, in which one-third of the sum is allocated for spending, one-third for saving and one-third for charitable giving.

To begin, a base amount is set aside for expenditures. Typically, experts encourage parents to initially provide a minimal amount—too much is worse than not enough. The national standard generally pegs a dollar of allowance a week to each year of the child’s age. Thus, a 5-year-old would receive $5 for the spending portion, enough to purchase a few “luxury” items such as popcorn at the movies, a favorite book in a series, or a birthday card for a friend. As the child matures, an allocation for daily after-school snacks or money to support a collection or hobby can be added.

“A child who grows up overvaluing or undervaluing money is in danger of losing it or being taken advantage of.” —Lauren Howard

Budgeting is a critical skill. The best way to teach this, according to Lauren Howard, a New York psychotherapist, is to sit down with the child and map out expenses, such as money for lunch and snacks, cabs or transportation, and entertainment. Parameters should be made crystal clear, and there should be an appeal process in case the agreed-upon amount is not sufficient. “By the same token, children should not regard their parents’ wallets as a bottomless pit,” stresses Howard. Some parents ask for a partial tally detailing where allowance money went, and they then go over receipts with their child; other parents are less formal.

Once the child has mastered the basics of the budgeting process, Howard suggests that we give him or her total responsibility for preparing an itemized budget and presenting it to us. “Ideally, you will bend on some things, and your children will bend on some things,” she continues. “This way, you are making them responsible contributors to the process and not dictating to them. Show them you respect them, and they will rise to the occasion.”

The notion of opening a checking account with debit-card privileges for a teenager makes infinite sense to Jon Gallo. “You’re educating your child about the mechanics of banking,” he explains. “And at the end of the month, you have a [spending] history in black-and-white in the form of a bank statement, which you can then sit down and review with your child.” He views credit cards as time bombs that children should learn to handle well before they leave for college, where they will literally be bombarded with applications.

One family Eileen Gallo counsels carved out a special time each month to sit down with their children to go over receipts. They simply ask: “Are you happy with how you spent your money? What would you do differently next month?”

Money for clothing is typically added to the budget between the ages of 12 and 14—presuming parents are confident that their teenager can handle the responsibility. Here, Princeton, N.J., financial advisor Eleanor Szymanski of EKS Associates recommends that parents do their homework—especially in totaling up how much money was spent the previous year—in order to establish a baseline. “The best way to teach children between the ages of 12 and 18 is to tell the child you’ve budgeted this much for clothing on a monthly, quarterly or even annual basis. Then let the child decide how to spend it and make his or her own mistakes.” The toughest part, she concedes, is “not caving if they run out of money.” In the end, the lessons learned about spending are well worth it. “The ultimate goal is to make your child independent and self-reliant,” she says.

The savings portion of the allowance can be dropped into an empty jar or deposited in an interest-bearing savings account, which demonstrates in dollars and cents the mechanics of how interest accrues. Alternatively, parents can offer to pay a special “family rate” of interest, perhaps offering to match funds that are saved over a period of time. In the later teenage years, parents may want to redirect savings into investments by opening an account with the family brokerage or with a separate broker.

Thomas Zanecchia, the president of Denver-based Wealth Management Consultants, applies the tripartite model in his own household with his two daughters (one in high school and one in her freshman year at college). “When the girls were 5, we opened accounts at the Young Americans Bank in Denver, where even the deposit slips are child friendly. I explained to them how they were making money while they were sleeping.” He advocates opening checking accounts for children as young as 11 or 12. At that age, it is more likely that a parent will be with the child as the check is written, so financial oversight can be given. Zanecchia introduced debit cards around ages 14 and 15, when he taught his girls how to enter their transactions into Quicken and began asking them to file monthly reports.

The third piece of the allowance equation is philanthropic donations. While parents should feel free to lobby for their own pet charities, if a child’s interest leans in another direction, he or she should not be redirected. “It’s a good opportunity to engage your child in a conversation about the charities you support, what they do, and why you support that work,” notes Howard. “But it’s equally important to allow them to generate their own ideas and opinions about worthwhile causes.” In Jilliene Schenkel’s family, December was the “giving” month, when accumulated monies were donated to the predetermined causes.

Leading by Example
Wealth managers, attorneys and counselors wryly observe the consequences that arise from failing to teach money management skills—or from delegating this responsibility to others. “There is an assumption that wealthy children have the genetic disposition to handle wealth,” says Deutsche Bank’s Smith. “It is an absolute fallacy. A child who grows up overvaluing or undervaluing money is in danger of losing it or being taken advantage of.” We should not assign the essential job of educating our children in these matters to nannies, financial advisors, attorneys, grandparents or expert advisors, either. This passive strategy communicates to the child that it is not all that important, and such an approach is also “fraught with the danger that someone else’s values will leak into the lesson,” Howard adds.

Teaching money management is like teaching a child how to ride a bike, adds Barber of Family Money Consultants. “You need to build concrete skills. If children don’t acquire these skills, they are thrown into situations that may be over their heads. It destroys their confidence,” she says. Among her patients, Barber has noted that those who did not have consistent allowances or whose parents used money as an emotional weapon have a far more difficult time managing money as adults.

“Children take away more from what their parents do than what they say,” observes Barber. The benefits of acting consistently and responsibly as a parent cannot be underestimated. A parent who loves recreational shopping may send a conflicting message. “Always lead by example,” adds Lauren Howard. “Never use an allowance as a bribe or a tool to get your kids to toe the line. The trick is to empower your children to feel that they are competent and capable of being good citizens, and that they can make a difference in this world.”

Dirk Jungé agrees. Today, he feels confident that his financial education program paid off by equipping his children with the tools to handle their own accounts. In fact, this technique has proved so successful, he is even thinking about writing it into the Jungé Family Plan. 

Illustration by Hadley Hooper