Introduce a sliding scale:
Teach your kids the real-world value of working hard for bigger rewards by giving them allowance on a sliding scale. Instead of the traditional $10 or $20 dollars per week, start with a minimum, say, $10. Then for good behavior or extra chores, they can earn up to whatever maximum you set (say, $20). Just a warning: this is a sliding scale, but it’s not unlimited. They need to learn to be content, too!
A little interest goes a long way:
In the event that your child does ask to borrow some money on top of their allowance (say, for a new bike or a special trip) ask that they pay interest on their loan. Make it simple so that they can see the consequences by asking for 5% per week until they’ve paid you back in full. So, if the bike is $100, they’re paying down $5 per week along with whatever amount they give you. This will encourage them to pay it back faster. So that the transaction doesn’t get too corporate, use the interest you earn on something you can do together, like taking that new bike out for ice cream!
Get started on savings:
Take your child to your local bank branch to set up a basic savings account. Most smaller branches will allow for tiny deposits — even in quarters and dimes. Then, agree on a certain percentage of their allowance and any cash gifts to put into savings (10% is a good one to start with). Make an event of it each month: go to the bank, make the deposit, and then celebrate with some small reward like a stop at the playground on the way home. Set major milestones — $10, $20, $100 in savings — and then agree to match them when they get to that point. Allow your child to see the interest accrued on the account each month; the more they see that number grow, the more they’ll want to add to it!
Teach your kids to start tracking their expenses by gifting them a fun-colored pocket-sized journal. Whether it’s a pack of gum or movie tickets, have them log what they spend their money on — and then go over them together to define what was a sound purchase versus a splurge. If they do make mistakes — which they will, we all do! — don’t judge; instead, go over why the purchase perhaps wasn’t the best use of their time and money in real terms (was it worth more than a month’s allowance? Etc).
Invest in their future — together:
When your child is still in elementary school, college might seem a long way off. But with the average yearly tuition for a four-year college public at $20,00 per year — and $35,000 or more for private — now is the time to start setting some funds aside. Get your kid in on the action by setting up a 529 plan, which lets you save tax-free for your child’s college education. Because it’s an investment account, money you deposit will grow at about 7% a year over the years you’ll be saving. Have your child contribute 5% of their allowance each week (or month) into this account. And now here’s the fun part: keep a little marker next to where you write down their height with how much the money has grown every time you measure them. You can both see how much their money has grown right along with them!
Make ‘em pay:
Rent, that is. If your child is older, making a paycheck but still living at home, it’s time that they contribute to the household income. Ask for a portion of their paycheck each month — 15% is a reasonable amount as it still allows adult children living at home to save money. But this doesn’t mean you should take this money and go out to dinner with it. Instead, set up a mutual fund (we like T. Rowe Price’s Automatic Asset Builder program, which lets you contribute as little as $50 a month to nearly any of its funds — and sneak under the usual $2,500 minimum initial investment. Invest their "rent" in this account each month, and then turn the cash over to them when they move out as a reward for solid investing — and to help find a place of their own.