The right way to give your teen an allowance: A lump sum

Here’s an idea: Hand your teenagers hundreds of dollars in one lump sum and leave it up to them to manage the money for the next, say, six to 12 months.

Anyone who’s ever had or been a teenager may quail at the thought, but experts say this approach actually can work much better than a weekly allowance in teaching older kids about personal finance.

The problem with weekly or even monthly allowances is that the cash simply comes too often. If your kid blows hers, she just has to wait a little while to get more. Less frequent lump sums, on the other hand, can teach teenagers how to plan and save for future expenses — two crucial habits they’ll need to get ahead financially.

We switched to the lump sum approach two years ago, when our daughter was still in middle school. I totted up what we’d spent on clothes for her in the previous year, added in a 10 percent fudge factor and plunked the money into her savings account just in time for back-to-school shopping. We told her the money needed to cover her clothing purchases for the next year, and that it was up to her to make sure it lasted.

Which she did. She discovered her money went a lot further at thrift and consignment stores than it did at the mall. She felt the pain of wasted money when an impulse purchase went unworn. She wrestled with whether to spend a huge chunk of her budget on Dr. Martens. (She eventually asked for them as her birthday present.)

The keys to making this work:

• Make the lump sum big enough — but not too big. Skimping on the amount won’t leave teens enough room to make choices, but giving too much means they won’t face hard trade-offs. It’s also important that the money be intended for necessities rather than “fun money.” When our kids gets out in the real world, most of their paychecks won’t be discretionary as they pay for rent, food, transportation, taxes and other needs.
• Keep talking. The real value in any kind of allowance is the opportunity it gives you to talk about money. Our daughter had to ask us when she wanted some of the clothing money transferred from savings to her checking account or prepaid card. That gave us a chance to talk about what she was learning, the challenges and choices she faced and our own experiences learning to handle money.
• Don’t bail them out. What if they blow all their money in the first week, or outgrow their last pair of sneakers when their account is on fumes? Let them figure out a solution, such as getting a job or earning money doing extra chores.