Pocket money can be a means of teaching children many valuable lessons in life.
It can help them to learn about the value of money, how to budget and save, how to make choices, how to wait for what they really want, and, ultimately, help them develop financial independence.
Perhaps the best time to introduce pocket money is when kids start primary school. At that age, they are old enough to grasp the concept of worth.
But just how much should you pay and should it be linked to household chores?
To determine the going rate, ask friends, neighbours and colleagues then work out what is appropriate for your children's age and your family income. A rough rule of thumb is $2 a week at around pre-school or early primary age, rising to $5 in later primary.
But don't just follow the herd and don't be bullied into a rate you think is too extravagant.
Then decide if you are going to link the pocket money to household chores.
There are two ways of looking at this issue. By linking it to age-appropriate chores and not just daily tasks such as making beds you may be instilling the idea they are getting paid for work because they are doing something that is truly valued.
Or it could have the detrimental effect of giving children the attitude that they will help out only when there is something in it for them. That's a matter for you to decide.
Once you have sorted out the amount and the manner in which pocket money will be paid, you need to sit down with your children to discuss what they are required to do with the money. Will it be for treats such as ice-creams and lollies? Will it be for the odd tuckshop lunch? Will it be paid weekly or monthly? If it's for treats, make clear that you will no longer be paying for these, especially if they run out of pocket money. They will just have to wait until their next pay day.
Remember, this is the time to set the guidelines to eliminate any conflicts. But there needs to be some flexibility, too, as there may be times when they are going somewhere special and you would like to give them a little bit extra as a treat.
While it is important to guide children, make sure you let them have a say in how they spend their pocket money. One friend's eight-year-old was desperately saving for a wooden puppet which her parents thought was a waste of money. They tried to deter her, but she determinedly put money aside each week.
After some months, she had the necessary savings so she bought the puppet against their advice. Yet she derived so much pleasure from it that they were forced to admit their mistake and support her future choices.
To help children establish a savings habit, you could recommend that they save a certain amount each week in their own bank account.
The banks offer fee free accounts for children, and so long as they don't make withdrawals, often a bonus interest rate is paid.
For children desperate for a big-ticket item, you could offer to match their savings dollar for dollar. Of course, this will also depend on your own financial situation.
To teach them how even small amounts add up, mix up how you deliver the money with some weeks in coins, other times in notes. As they get older, you may wish to set up a direct debit into their bank account.
As their birthday approaches, you can increase their allowance by a fixed amount and extend their purchasing responsibility. For teens, this may mean something like buying small fashion items.
Some parents may wish to cease paying pocket money once their child is old enough to get part-time work. For them, financial independence can't come quickly enough!
How much is enough
Age 7: $2 a week
Late primary: $5
Secondary: $10
Add chores as the amount rises
Teen tips
Have a dream to save for.
Open a saving account before you apply for a mobile phone account.
Pay yourself first - set aside 10 per cent of any earnings for savings.
Live within your means - write down a weekly budget.
Remember compount interest - you earn interest on interest if you don't take money out of the bank.
See www.cu.net.au for more cool tips.
Do it!
Linda Gough is an executive vicepresident with BTFunds Management. This information doesn't account for your investment objectives, particular needs orfinancial situation. These should be considered before investing and we recommend you consult a financial adviser.
