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Teach Your Children How To Manage Money, Part 6

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No discussion of kids and money would be complete without a look at allowance. Money Matters reporter Tara Lynn Wagner has more on how to dole out this important financial lesson.

When it comes to giving kids an allowance, the weekly ritual is about far more than just handing over cash.

"Allowance gives you an opportunity to talk to your kids about money 52 times a year," says Dr. Barbara Nusbaum, a psychologist.

Whether they're six or 16, this arrangement can serve as the training wheels that will help them find their personal financial balance, depending of course on how it's handled.

So when should you start, and how much should you give?

"The good age to start an allowance is maybe about six or seven," says Linda Descano, president and CEO of Citi's Women and Co. "Generally, parents pay $1 for each a year of the child’s age. So for a 5-year-old, you get $5 per week."

And make that five actual dollars, because in a world of plastic, the best way to make money real is to use real money.

"Giving kids crisp $1 bills or $5 bills from the bank is actually kind of a nice experience for them, and it makes it much more tangible," says Beth Kobliner, author of "Get a Financial Life".

Next, set some ground rules about how the allowance is to be used and what it should cover.

"Is it for whatever you want to spend?" Descano says. "Is it suppose to cover music downloads, movies, snacks and clothing?"

Once they understand the parameters, they will be able to make choices, and those choices will have consequences. It's an important lesson that's best learned the hard way.

"If it comes around to Friday night and your 13-year-old wants to go to the movies, and they've spent all of their money, well, then they might not be able to go to the movies," says Donna Rosato, a senior writer with Money Magazine.

Unfortunately, it's also a lesson many parents immediately undermine by giving in and giving more.

"That's actually the antithesis of what you want to do, because you are giving them an allowance to teach them about money, to teach them those limits," says Carmen Wong Ulrich, president and co-founder of ALTA Wealth Management. "So make sure that you don't give in."

Finally, experts warn against tying allowance to so-called citizen-of-the-house chores, a method that can easily backfire.

"They could choose not to do them," Rosato says. "'Well, I don't want the money, so I'm not going to worry about good grades."

"Because then your kid starts saying, 'I'm going to clear the table. That's five bucks, mom,'" Kobliner says. "And that's not acceptable.

It's also not the point. At least, not according to Nusbaum, who says the goal of an allowance isn't to motivate. It's to educate.

"You are giving kids allowance so you can guide and mentor them in how to manage money," she says.

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