Use children's allowance to teach valuable money skills

When it comes to children's allowances, many parents struggle with which approach to take. Some link allowances to completion of chores; others feel they shouldn't be tied to completing tasks, but rather, be an opportunity for kids to begin to learn money-management skills that will serve them later in life.

My wife and I agree with the philosophy espoused by Kristan Leatherman, co-author of "Millionaire Babies or Bankrupt Brats," a guide for parents to teach personal and financial responsibility. Leatherman says children should be responsible for certain age-appropriate chores designed to teach responsible behavior by becoming contributing household members – with allowance falling outside that equation.

Leatherman believes that separating allowance from chores "allows" your kids to experiment with money, to make mistakes and learn from them in a safe environment, and to make their own earning, saving, borrowing and spending decisions. She notes, "Why wait until our children are forced to learn about personal responsibility and money the hard way? Why miss those opportunities when the lessons are easier to learn on a daily basis and the price tags for mistakes are so much more affordable?"

As an example, we give our 9-year-old son a weekly allowance, and he can do additional chores, like washing the car, to earn extra spending money. He also knows that he must give back 10 percent to charity, since that's an important value of ours. Our 5-year-old daughter will soon be ready to jump into the allowance pool, but in the meantime she has her chores as well.

Wherever you fall on the allowance spectrum, here are several factors to consider:

What can you afford? Most younger kids don't really understand where your money comes from or that allowances are merely one portion of your overall budget. In these tough times, speak candidly with your children – albeit without alarming them unnecessarily – about what your family can and cannot afford, your monthly expenses and savings goals.

As Leatherman explains, "Allowance should not be considered a salary and it is not an entitlement. Kids need to know that there may be a time when allowance does not fit into the family budget due to other, more pressing expenditures."

Parental role model. Your own spending and saving behaviors will likely influence how your kids manage their allowances – and later treat money as adults. If they see you spending beyond your means, not setting aside emergency savings or making impulse purchases you can't afford, then your entreaties to save for a rainy day will fall on deaf ears.

Share your decision-making processes and encourage sensible behavior. For example, you could teach the value of saving (and delayed gratification) by offering to match money your son saves or earns for a particular toy. Or, if your daughter wants shoes outside your price range, find a household job she can do to make up the difference.

Needs vs. wants. Leatherman's book offers advice on teaching your children to distinguish between needs (essential items needed to exist like food and shelter) and wants (conveniences and luxuries like toys and designer duds). She favors an approach where kids understand that parents will provide basic necessities and the "wants" are negotiable. That way, children can learn how to prioritize their wants and plan how they're going to spend their money.

For more tips on structuring your children's allowances, visit Visa Inc.'s free personal financial management site, Practical Money Skills for Life (www.practicalmoneyskills.com/allowance).