In order to teach your kids about economics, you need to give your kids money of their own. That’s right—an allowance is a great way to teach your kids money skills. However, just giving your kids an allowance does not guarantee that you will have kids who handle money well. The fact is, money and kids are not a good combination without proper instruction. Kids tend to spend money as fast a they receive it, and it is up to the parents to teach them how to properly handle their money.
A great allowance system to use with kids' money is the envelope system. In this system, the child, usually around twelve years old, is responsible to buy their own clothing, recreational items, and other expenses. Food, of course, is not included in this. The parents determine the amount of money necessary for the allowance that will allow the child to have enough money to purchase everything they need. A good rule of thumb is to take the age of the child, plus half of the age again, and give that amount per week. That sounds like a lot, and it is, but the child will be responsible for almost all of his or her expenses.
What the parents then do is sit down with the child and help them designate money for different envelopes. There will be an envelope for clothes, recreation, charitable expenditures (it is never too young to teach about this), toys, and savings. Other categories may be deemed necessary as the parents and child work through the budget. Each week, the child puts the money in its designated envelopes. When he needs socks for soccer, he takes money from the clothing envelope. When she wants to go hang at the mall with her friends, she takes food money from the recreation envelope. Sometimes the kids' money in one particular envelope may not be completely spent in a week. This will teach the child that saving can give them a larger amount to spend on, say, a prom dress.
What this system eliminates is the begging and wining for stuff when out shopping with mom or dad. If the child wants a new video game, he can have it, if he has money in the recreation/toy envelope. Also, the child should always have a large item that the savings is designated for. Teaching the value of savings can never start too early! This system allows parents to guide their child into learning how to properly handle money. It should not be so rigid that if the child is in dire need of something, the parents cannot help out, but this should be the exception, not the standard operating procedure. With this system, children can learn the life skills needed to create, and stick to, a good budget.