Knoxnews.com

Alexander: Practicing money: Allowance is best tool to teach kids about money

By Susan Alexander
Posted January 4, 2010 at midnight

Kid holding money

My children will tell you I'm notoriously cheap. But the truth is Hubby and I have provided them with an allowance for, collectively, 50-some years now. Yikes.

Oldest son is no longer on the dole, and we've only got another 18 months or so (we hope!) before his oldest sister steps out into the wonderful world of independent finances.

Though we've never given large sums, we try to base what they get on a squishy combination of what their needs are and what they contribute to the household, with more emphasis on need than contribution. College daughter, for instance, gets more allowance than high school daughter; but then again, we supply the youngest's lunch money and clothing needs. Once we hand it over, they save or spend it on their own, and we hope they figure out to spend wisely. For the most part, I think they have.

But after talking with Anton Simunovic a few weeks ago, I wish we could back up and rethink the whole system.

Simunovic, a Connecticut resident with an MBA from Harvard, a wife and six children ages 11 years to 3 months, launched in September a Web site, threejars.com, geared to teaching kids as young as six the satisfaction of living within their means, the wonders of earned interest and the joys of sharing.

The Web site allows parents and kids to track allowance money and to divide it into spending money, savings and donations as determined by parent and child. He developed the system to help his own kids "learn important lessons that stick."

Money that goes into savings earns a little bit of interest, paid by mom and dad, to teach kids about the benefits of compounding.

"If you want kids to really understand, they have to manage their account themselves," he says. "When they see for themselves that frivolous spending leads to less savings, which leads to less interest, things click."

Simunovic says he and his wife do not tie allowance to chores.

"I think allowance is the best tool a parent has to teach kids about money. When one confuses it with chores, you lose a valuable opportunity. Our kids absolutely have to do chores; whoever lives in our house has an obligation to help.

"But money is a life skill, and allowances lets kids practice money. We've got to allow our kids to practice, just like they practice athletics and music, when dollar amounts and consequences are low."

His 11-year-old, he says, is a spender, and they've worked together to set up his money so that 60 percent goes to savings, 30 percent to spending and 10 percent to sharing. The savings earns interest, and his son is learning how money can work for him.

His 9-year-old daughter, however, is a saver "almost to the point of hoarding," he says.

"She wanted to save 70 percent, share 10 and spend 20. I said no; I wanted her to have more of a balance. Too much emphasis on saving make us small and petty. I want her to think more broadly; it's OK to spend."

His third child, age 7, is a giver.

"She wanted to share 56 percent of her allowance. I brought that down. I don't want to kill that spirit, but she's realizing she's running out of money in share, and I say no, you can't transfer (from savings); let it grow again."

He says working with his kids and their money has had another interesting - and important - side effect.

"It's led to so many fun, light conversations at the dinner table," he said. "It's such a great way to have important financial and social conversations: Should we give our money to saving the seals? To feeding kids in Bangladesh? The kids are initiating those conversations. So it's not the parents talking at the kids; the kids are empowered to make those decisions.

"No one wins when the family is mum about money. That blank is filled in by a barrage of messages they see every day. Of course they're going to consume, but they can learn to be smart about it.

"It has to be taught at school, but it can't be left there. It has to be taught at home," he said.

Susan Alexander may be reached at alexanders@knoxnews.com or 865-342-6431. She is the News Sentinel features editor.

Get Copyright Permissions © 2010, Knoxville News Sentinel Co.