Money-savvy kids. Money-savvy parents.

Rules of the allowance game.

I’ve got three simple words of wisdom for gainfully employed parents who include kids’ allowances on their list of money problems.

Break the cycle.

Most of the time, the financial problems adults face directly relate to the financial illiteracy of their own parents. Like father, like son. Like mother, like daughter. Bad habits involving spending and saving are passed down through families. It is the responsibility of the self-aware adult to come to grips with this reality and – break the cycle.

The argument, “It’s not my fault, my parents weren’t any good with money either,” just doesn’t hold. The definition of being an adult includes self-reliance and taking financial responsibility. It’s easy to blame others for your own shortcomings. The problem is, doing so nets you absolutely nothing.

Unfortunately, our school systems generally don’t teach kids about money, so youngsters must learn about the ins and outs of personal financial management at home. But there is a big upside to this: mothers and fathers who take the time to educate their kids about money are bound to themselves benefit from the process both personally and as parents.

So, here are some rules for parents concerning the allowance game. Follow them and chances are excellent that as a money-savvy parent you will raise money-savvy kids.

• START EARLY

Psychologists tell us that children as young as three have a general concept of what money is – or at least what it can do. So it’s appropriate to start putting money in kids’ pockets not too long after they stop putting money in their mouths.

Coins apportioned on a weekly basis help little ones understand the proportionate value of money and the dynamic nature of its ebb and flow. And it’s never too early to introduce youngsters to the concept of savings, best done with a see-through piggy bank whose full contents can eventually be used to demonstrate the power of savings to purchase a “big-ticket” item  – say, a stuffed giraffe.

• BUDGET AND BE CONSISTENT

As kids grow older, maintain a strict regimen in relation to their allowances that is within your means. This means you yourself ought to have a monthly household budget for the money you allow the family at large.

Gradually increase the amount of the allowance over time, always pay on time, and avoid linking the allowance with everyday household chores, which within the family should be a given that is not dependent upon what could end up becoming a “negotiable” reward. However, as children progress into adolescence, it is wise to assign special tasks for which the child receives additional “incentives” over and above the regular allowance.

Also, on the odd occasion when you might have to borrow money from your kids, make sure you pay it back promptly lest you start sending mixed messages about the importance of discipline.

•  MAINTAIN DISCIPLINE

To introduce the idea that budgeting is most important, you must teach the child that there are limits to resources and there are consequences to overspending an allowance. Therefore, if your child runs out of money as part of an allowance that is devoted to non-essential items (discretionary income you could say), then no more money should be forthcoming for that allowance period.

For older children – teenagers in particular – whose allowances may cover essential items such as clothes and school supplies, discipline for overspending may include covering the shortfall by deducting money from future allowances, including especially the “discretionary” funds that form part of that allowance.

In these circumstances, another great way to educate kids about the value of money is to provide them an “advance” against which you charge interest. Also, you can play the “status” card. Acquire cheaper, not-so-trendy replacements for stuff your child needs and/or wants. Money wise, there is a no more powerful way to educate kids than to suddenly introduce them to the threat of a drop in status among peers.

Meanwhile, I caution against withholding allowances for bad behavior not associated with the allowance. Withholding money may create resentment that exacerbates the child’s bad behavior. Find other ways to discipline the child on this front.

• COMMUNICATE, MAKE KIDS FEEL SPECIAL

Teenage years are pivotal in financial literacy. This is the period when the youngster ought to be given – and to be taking – more and more responsibility for the way money is handled. Engage and involve your children in family matters concerning money. You ought to have set monthly and yearly budgets for the family. Set aside a special time to walk your children through the process. Be open with them and keep them up to date on the family’s financial standing. Your kids will respect you for it, even if they grumble at first that it’s boring.

Also, as they enter their teens, or even before that time, your kids should be familiar with the process of opening chequing and savings accounts at a bank. If you can swing it, take out RRSPs in their names, which will make your kids feel special.

• AVOID NEUROTIC BEHAVIOR

Do not play the money martyr with your children, giving them what you never got as a child at the expense of overspending yourself. Many parents do this, denying themselves needed and wanted items just to keep the kids happy. The trouble is, parents end up resenting themselves for such behavior because at some level of consciousness they know they are being unrealistic. You know you’re a money martyr when you hear yourself saying things to your kids like, “After all I do for you, this is the thanks I get.”

In terms of kids and allowances, always be realistic, disciplined and fair. By doing so, your own financial literacy will likely improve too.

Happy parenting.