There's no single, correct way to handle pocket money. Every family would have to make a decision based on what fits them best.
When to Start
No particular age is the best or most appropriate. However, by the time children are 10 years old, most of them have had experience of making decisions on spending money. They also have developed sufficient mathematical skills to be able to do their accounting and yet look to parents for guidance.
How Much to Give
There is no standard amount which is right. It depends entirely on your financial situation and what kind of commitment you feel that you can comfortably keep. You could follow the formula recommended by some of giving Rs.5 or Rs.10 per week for every year of a child's age for instance Rs.40 or Rs.80 for an 8 year old child. Regardless of how much you choose to give as pocket money, give it regularly and increase the amount as your child gets older.
Pocket Money and Chores
Should the pocket money be tied to chores? Again, it's a personal choice. Some experts think that it's important to make this connection so that kids learn the relationship between work and pay. Others say that kids should have a responsibility to help with housework, irrespective of any financial incentive.
Ultimately, it's up to the parent to decide what works best for your family and what fits with their child's personality. Whatever you decide, be sure that the child understands the arrangement and the parents abide by their commitment.
If you do decide to connect housework to the weekly allowance, make sure that your kids understand what their responsibilities are and the consequences of not doing them. You might want to involve them in choosing the chores, and then keep a chart posted to remind them what needs to be done.
To instill the right values in children it is extremely important to be consistent. Abiding by your promise to give a regular allowance sets a good example for your kids and is incentive for them to honour their end of the bargain. If you are not consistent in paying as per your agreement with the children, they might lose that incentive and stop doing the chores.
Spending the Pocket Money
How should kids spend their pocket money? It goes without saying that pocket money should be used by the child for discretionary items, not essential purchases such as food or clothing.
You may want to encourage children to put away a portion of their pocket money for saving and another for charity. If so, let them choose where to donate the money. It may be a cause that a child can relate to in some way, like an animal shelter or an organization that helps under-privileged children.
If some of the allowance goes to savings, consider setting up an account at a local bank or the post office. This way, your child can keep track of the money. Many banks offer special bank accounts for kids, and the children may enjoy the experience of checking their financial status and receiving bank statements.
Keeping Track of Spending
You might want to encourage children to keep a record of how they spend the allowance. They may keep a diary and make a note of all that they have spent their money on. This will help them realize how small and seemingly insignificant purchases of Rs.5 and Rs.10 can add up to a lot and make the pocket money disappear in no time.
Beyond Pocket Money
Once kids become teenagers, you may want to provide a quarterly clothing allowance or hobby allowance in addition to the weekly allowance.
If you do, establish a reasonable budget and allow your kids to spend it as they wish - but also to honour its limits. For example, if your son chooses to spend Rs 4000 on a pair of shoes or your daughter opts for a pricey handbag, they might have to make a compromise on other spending or save for that expensive item on their list.
Receiving and spending pocket money can thus become a great learning experience for children and go a long way in instilling good money management skills.