The best way to make kids smart about money

Millennials now the largest living generation
Millennials now the largest living generation

Parents teach their kids all sorts of practical skills: how to read, ride a bike, cook, and eventually how to drive.

But what about how to handle money?

Many parents are uncomfortable discussing money with their kids because of their own perceived lack of financial savvy.

"When our kids raise the subject, most of us go into panic mode," writes Beth Kobliner in her new book Make Your Kid a Money Genius (Even if You're Not). "In short, we avoid teaching our kids the financial facts of life..."

But there is a simple tool that many personal finance experts suggest giving kids to help teach financial responsibility: an allowance.

Here are a few guidelines experts recommend to follow:

Related: It costs $233,610 to raise a child

At what age should I start?

Dee Shepherd-Look, a clinical psychologist and retired professor of psychology, recommended starting an allowance when children enter the first grade, and increase the amount as they age.

"This way it becomes a normal part of family routine."

While money lessons should start early in life, she noted that children don't tend to start to value money until they are in junior high.

How much should it be?

One rule of thumb is to tie the amount to the child's age, Kobliner said. So a 5-year-old could get $5 a week, while a 10-year-old would get double that.

Though parents should give an allowance that fits within their means, it's also helpful to figure out the "going rate," she added.

"I realize $780 a year in walking-around money for a 15-year-old is nothing to sneeze at. So, of course, adjust the allowance amount according to your survey of what other parents are doling out, as well as what works within your family's budget."

What should the allowance cover?

Parents should outline what expenses they will cover and what kids will be expected to finance. For younger kids, Kobliner suggested they be on the hook for smaller items like candy at the movies or buying an app.

As children grow, so should their allowance and financial responsibilities.

"Once they hit middle school, you still pay for the basics, but maybe for the school year when you go shopping, you cover three pairs of jeans and if the kid wants an extra cool pair, they have to save for it or pay the difference," Kobliner said.

When high school rolls around, kids should become even more financially independent, she said. "If they want to go out to dinner with friends, that could be on them."

Related: Is it ever too early to start saving for college?

But kids should also learn that money is not just for spending on yourself. Parents can outline expectations of how much of an allowance kids can spend, save and donate to teach them budgeting concepts.

One popular method is the one third rule, Kobliner noted. One third of the allowance goes into savings, another third into spending and the rest is donated.

Parents can also put restrictions on what kids purchase with their allowance. For instance, some parents don't want kids buying candy or certain toys with their money.

"You can have those rules, that's a parent's prerogative, but try to give kids as much freedom outside the purchases you really object to so kids can feel like 'this is my money," said Kobliner.

Should kids have to earn it?

When it comes to earning money, an allowance shouldn't be based entirely on chores, according to some experts.

But some tasks can be paid, while others should be expected, according to Shepherd-Look.

She outlined two types of tasks: those kids need to do to maintain themselves and be part of the family -- like picking up toys and cleaning their rooms -- which should not be paid, and then paid responsibilities like yard work.

A portion of the allowance, like 10%-20% can be automatic, while the rest has to be earned.

"Kids need to be part of the family. In today's world money is an important thing to have, and it gives them a little a bit of power and control in their lives," said Shepherd-Look.

Whatever type of allowance you settle on, outline the expectations clearly and keep it consistent.

"Whatever your method is, the most important thing is you don't change your mind," Kobliner said.

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