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Personal Finance - 5 tips on giving allowance to kids

06 Aug 2012

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For children, financial literacy begins at home. The first step is doling out pocket money, which not only gives them financial independence, but also offers parents the chance to educate them about the value of money. Here is the lists of things you should keep in mind before you use this financial tool.

1. How should you fix the amount?

You can splice the financial learning of your kid in four stages or age bands—5-8, 9-12, 13-15 and 16-18 years. Start the allowance at around 7 years or the age you are comfortable with depending on the kid’s ability to handle money. If you don’t think he is ready to take on the responsibility, delay the allowance by a few months or a couple of years. Revise the amount with age as the child’s needs and preferences change, from buying sweets and snacks at 8 years to eating out with friends as a teen. It is advisable to start with small, weekly payouts and increase these progressively to a monthly amount because it is easier for a 7-8-year-old to manage small sums over shorter periods than a bigger lump sum. It is also a good idea to fix the amount after inquiring with other parents to avoid peer pressure for the child. However, keep your own budget in mind before doing so.

2. Give a piggy bank or open a bank account

Financial independence can trigger a spending spree in your child. So, the start of an allowance should ideally be accompanied by a short talk on maintaining a fine balance between spending and saving. Encourage the child to save before spending, a habit that can ensure financial security when he starts earning. Initiate him into it by gifting a piggy bank or opening a bank account for him (most banks allow kids’ accounts at 8 years). Guide him into depositing the money received on festivals or as gifts from relatives in the account. It is also the right time to open him up to the idea of setting short-term goals (buying a favourite toy, iPod, books, etc) to incentivise saving. Pitch in occasionally if the cost is high and the child is sincere about saving for a goal.

3. Monitor the spend, but let him decide

The idea of giving an allowance is to provide financial freedom to the child and a chance to hone his monetary skills. Do not hamper it by incessant pointers on how much money he should spend or what he should buy. Your job is to set a framework and ground rules for spending, not to fix the targets for him. Allow him to set his own goals, be it short-term like buying a phone or long-term like purchasing a bike, and decide on the means of getting there. He is bound to make mistakes while doing so; let him. Guide him when he needs your help and assist him in strategising, but let him choose his own course. However, it is important to monitor his spending and ensuring that the child is not misusing his allowance by indulging in gambling, or buying alcohol, cigarettes, etc.

4. Don’t bail him out financially

Children are bound to make mistakes in the process of managing their new responsibility. It is better that they do so at this stage with fewer funds than suffer bigger losses later in life. So accept the fact that your child will lose money or make the wrong spending choices, leaving him with inadequate money for important purchases at the end of the month. At such times, do not bail him out. Providing additional funds every now and then will not create any discipline or induce any learning for the child. Since borrowing or lending is common among teenagers, advise your child against the pitfalls of debt or excessive lending and monitor such dealings.

5. Don’t pay for errands

This is a mistake made by most well-meaning parents. Don’t offer the child a chance to pad up his allowance by making money the incentive for academic achievements or carrying out household chores. It’s critical to specify the difference between duties or obligations and money-making opportunities, between earnings and rewards. So washing the car can fetch money, not keeping the room clean or getting good grades in class. Similarly, in case of misbehaviour, don’t deduct any amount from his allowance; find other means to discipline him. This will only inculcate greed, not value for money or labour. Worse, the child will always expect to be compensated for every minor errand or behavioural improvement.

Source: ET Bureau BACK

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