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Empowering kids with budgeting habits: Allowance as a tool for success

Published: Sunday, Nov. 25 2012 12:00 p.m. MST

Four-year-old Nicholas Bakke gallops down the toy aisle of Target in Atlanta with a crisp $10 bill between his small fingers.

"I want the Four Arms action figure, Dad," he says, standing on the tiptoes of his light-up sneakers to reach the gadget.

David Bakke points to a bright red fire engine truck. "You could get this if you save your allowance for two or three more weeks," he says.

"No, I want this today," the boy insists.

Parents give their children allowance with the hope that handing them cash will teach them money management, but most are only learning how to spend it, rather than how to save it. The average child with an allowance pulls in $65 per month, totaling $780 per year — a sum that provides a child enough money in a year to afford an Apple iPad or three Kindles and still have money left over.

It's money that 1 percent of parents say their kids save any portion of, according to new research conducted by the American Institute of CPAs (AICPA). That's why experts say that as parents work to teach their children money management, shifting the focus away from entitlement and towards charity can be crucial.

"The real world isn't run by an entitlement program in which money is handed to you just by the nature of your existence," said Neale Godfrey, author of the New York Times best-seller "Money Doesn't Grow On Trees: A Parent's Guide To Raising Financially Responsible Children." "Children need to know the satisfaction of good honest work. Children need to know what money can and can't do, so they don't confuse net worth with self worth."

A nation of spenders

Experts found that the most common ways kids spend their allowance money is by hanging out with friends and purchasing toys — something their parents are doing on a larger scale, coming out of a national savings rate that has been in the negative until recently.

The U.S. is a nation of spenders, Godfrey said. It's part of our DNA as consumers to spend. "We're even being encouraged in these tough economic times to spend our way out of the recession."

And our children? Failing to teach them the values and skills of responsible money management at a young age is like handing car keys to a teenager who has no experience behind the wheel, Godfrey said. "We can't expect kids to intuitively understand what to do with money."

The 61 percent of parents who hand out allowances are "significantly more likely" than their non-paying peers to be covering the costs of their kids' digital downloads, movie rentals, mobile phones and expenses related to hobbies and sports, the study found. Allowance, then, becomes an outlet for frivolous expenditures.

The long-term effects of such spending habits are jolting: There is a higher stress level surrounding financial issues than there is around combat.

Empowered by allocation

In nearly nine out of 10 families with kids getting allowances, children are chipping in at least one hour of chores weekly, the study found. However, while children are working for their allowances, they're also burning holes in their pockets. Remember that 1 percent of parents who say their kids save a portion of their earnings.

Budgeting habits teach children values that go beyond monetary value, said Denise Winston, author of the upcoming "Money Starts Here! Your Shortcut Guide to Financial Freedom." Children learn to set and accomplish goals, put math into day-to-day practice and make decisions about where and how to spend money.

Parents can start early, using raffle tickets with children between the ages of 3 and 5, as a form of allowance for things like TV and video-game time, Winston said. As the child gets older, parents can pay them in small bills and change.

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