Advances on Allowances

Advances on Allowances - When giving your child an allowance, should advances ever be allowed? It's an important question, and one you should have decided on beforehand.

The Drawbacks of Allowance Advances

The recommended answer here is "no." There are several drawbacks to allowing your child to take an advance on his or her allowance:

• Advances undermine the concept and practice of delayed gratification. Delayed gratification is one of the most crucial - and challenging - values you can instill in your children. Long term success in any area of your child's life, be it financial or non-financial, depends to a large degree on how willing they are to embrace delayed gratification. Frequent advances only undermine the practice of patience and long term thinking.
• Advances promote poor money management skills. If children can't live within their means when young, if they're borrowing from the future and always pestering you for, in effect, kiddie payday loans, what kind of financial future are your reall preparing them for?
• Advances can be a nightmare to track. Most parents already have a thousand things to keep tabs on and worry about. Do you really want to spend your mental energy trying to remember how much to adjust your child's next allowance, or finding room on your refrigerator for another scrap of paper to remind you? And it only gets more complicated when you have more than one child receiving an allowance.

There are exceptions, of course, when it might make sense to allow you child to take an advance on his or her allowance. But be sure to determine the circumstances and ground rules ahead of time, and try to learn a few tips and tricks to make it easier for all parties involved.

Exceptions - When You Should Consider Giving Your Child an Advance

So when might it be a good idea to allow your child to take an advance on his or her allowance? Well, it's a pretty short list.

Advances should really only be given for very special situations or unique opportunities.

Preferrably these should be for events rather than for material possessions. Events are experiences that can last in memories for a very long time. They are also less likely to be available while the child tries to save money - think about that concert that you still remember today.

In contrast, that cool new toy or iPod or computer will still be around 3 or 6 months from now while they learn first hand the power of patience and saving.

Another tip - if you do allow an advance, consider doing so only when the advance can be paid back in a certain time frame - say one month's worth of allowances. Otherwise you're just signaling to your child that racking up long term consumer debt is acceptable.

So what if you're at the store with your child and he or she spots something they really want and can afford . . . except they left their money at home? Is it OK for you to pay for it yourself, in effect lending them the money until you get home when they'll reimburse you?

It's your call. Generally, I don't think there's anything wrong or unhealthy about the practice. You don't want to become too rigid in your attempts to teach your kids sound financial principles.

On the other hand, if this is a regular occurrence, you might want to re-evaluate your policy. If, for example, you've got a real spendthrift kid on your hands who has little self discipline and typically wants to buy anything he or she sees, you might want to impose some stronger boundaries and require them to pay for their purchases in person with their own cash.

Should You Charge Interest on Advances?

This one is an interesting idea. No, the purpose isn't to find an extra source of income for you. But it can be helpful in illustrating to your child some important lessons about money management.

This really depends on the child and what you are trying to teach them. Generally, adults have to pay interest on money they borrow, so why not give them a little taste of how that feels?

It may be that simply foregoing their allowance for a month or so in order pay back the advance could be enough of a lesson in borrowing without tacking interest onto the transaction as well.

But if you do decide to charge interest on your child's allowance advance, I suggest you make it a round number - maybe $1 - instead of a percentage. The lesson is still the same without the complications of compound interest.