Allowance and financial literacy

You've seen the commercial: Customers breeze through a shop, paying effortlessly with their debit cards, when the entire operation grinds to a halt because one - supposedly clueless - customer decides to pay with cash. What we don't see is what happens when the debit card customers overdraw their banking accounts because they're dancing through checkout lines without looking at their balances.

A survey conducted by the Jump$tart Coalition for Personal Financial Literacy and funded by the Merrill Lynch Foundation reveals that members of the high-school class of 2008 know less than their peers from 2006 about financial concepts.

48 percent correctly said that a credit card holder who only pays the minimum amount on monthly card balances will pay more in annual finance charges than a cardholder who pays their balance in full.

17 percent correctly answered that stocks are likely to yield higher returns than savings bonds, savings accounts and checking accounts over the next 18 years even though there has never been an 18-year period where this wasn't true.

40 percent correctly answered that they could lose their health insurance if their parents become unemployed.

36 percent think a house financed with a fixed-rate mortgage is a good hedge against a sudden increase in inflation, compared with 45 percent in 2006.

These numbers are sobering. The survey participants were high school seniors, 17 and 18 years old about to embark on adulthood without a clear understanding of finances.

Teaching your kids financial literacy can start with the age-old tradition of an allowance. An allowance offers kids a chance to control their own money, even if it means making mistakes with it, says Linda Leitz, a local financial planner and author of "The Ultimate Parenting Map to Money Smart Kids" and mother of three high school students.

The mistakes kids make with their money usually will have small consequences. The hope is it will teach them not to make mistakes later in life that will result in much larger consequences, such as bad credit or worse.

"We all have to teach ourselves that the fact someone will take our card doesn't mean we should use it," Leitz says.

Money from allowance is the first "income" most kids have and people often wonder whether or not allowance should be tied to chores. In the book "Money Doesn't Grow on Trees: A Parent's Guide to Raising Financially Responsible Children," Neale S. Godfrey asserts allowance should be tied to chores. Not only will it teach money management, he writes, "this weekly sum will also show your child the relationship between work (chores) and money (allowance), clearly an important concept."

"We've done both in our family," says Leitz. "We pay for chores now, but when the kids were younger, we paid allowance for allowance sake."

In the second case, allowance is still earned. It is earned by being a productive member of the household - the child carries his share in the household but isn't paid for a particular chore, Leitz says. "You need to be careful to not use money as enticement or hammer."

A prepaid debit card given as allowance can be a good tool for teaching kids about managing money. Debit cards are appropriate for teenagers, says Leitz. A lot depends on your child and how he handles his money.

The concept of credit and debit may be too advanced for younger children, but they can get an education about saving and earning by turning to Kablinga. com, a Web site for kids and parents where kids can start a virtual business. They create a contract with their parents, deciding which chores they'll do and how much they'll get paid for each chore. Kids keep track of daily chores, as well as extra chores that may earn them more money.

They can create invoices to send their parents and record their earnings. The Web site also features a parent-controlled buddy list and a voicemail account where parents can leave messages for their kids. A goal board allows kids to track their savings for something special they want to buy.

Based in Denver, Kablinga.com is the brainchild of Nick Lumpp and his business partner, both Air Force Academy graduates. A subscription to Kablinga.com is $5.99 per month or $8.99 for unlimited kids within the same household.

The Web site which "feels almost like a game," helps kids learn the value of a dollar and the value of earning a dollar, says Lumpp.
While part of the education is learning about earning money, some parents don't like to attach money to chores, Lumpp says, so Kablinga.com is applicable to various parenting styles. Kids can still use the goal board to keep track of how much money they've saved.

A clothing allowance is the best way to teach a balance between needs and wants, Leitz says. All clothes come out of that allowance, both the necessary - socks and underwear - and the fun stuff - a trendy outfit. Parents may want to buy their kids a good winter coat and a nice dress outfit so the kids are warm and don't end up wearing jeans to Aunt Betsy's wedding.

The amount of allowance you give your kid depends on what it's for. If you've got a teenager who drives and you want her allowance to cover gas, you'll have to give her about $50 to $75 a month, Leitz says. If that money covers clothing, raise it to about $100 per month. If you expect her to also pay for lunch during the school week, go up to $125 to $150.

If you decide to give your teen a prepaid debit card as allowance, don't load it up with money at the beginning of the month if he has no experience budgeting his weekly spending. Start off recharging the card once a week, then move up to biweekly, then once a month.

Then, if he doesn't budget properly and runs out of money for essentials, make him figure it out, Leitz suggests. If he doesn't have gas money, he can catch a ride or ride the bus. If he doesn't have lunch money, he can pack a lunch. But don't do it for him.

"At some point, (kids) are either going to flounder or not," says Leitz, "No matter what tools you provide them."