Why an allowance?

To learn to ride a bike, you need a bike. And to learn to manage money, you need … a little money. By practicing with their own money, children get to try out concepts – saving for a rainy day, prioritizing goals, and delayed gratification – that might otherwise seem abstract or irrelevant.

Allowances give kids room to make mistakes in a low-risk environment – sort of like learning to drive in an empty parking lot. If your 8-year-old can't go to the movies with a friend's family because he burned through all his allowance buying action figures, he may be more likely to plan ahead when he gets next week's allowance.

Think of it this way: Teach your child the pitfalls of impulse buying early on, and he's less likely to arrive on your doorstep years from now with a duffel bag full of dirty laundry and a mountain of credit card debt.

What's a good age to start?

Around age 5 or 6 is typical. But some parents start in the preschool years, while others wait until age 10 or older. There's no magic starting time, says Kristan Leatherman, coauthor of Millionaire Babies or Bankrupt Brats? Love and Logic Solutions to Teaching Kids about Money. "The best time is when your child begins to understand that money can buy him things he wants."

So if your child tends to shrug at money, losing it before it can find its way to his dusty piggy bank, hold off until you see signs that he enjoys saving it or thinking about how he might use it.

How much is reasonable?

Consider your family's financial resources, the cost of daily living in your area, and your own comfort level. "I've seen it all over the place," says credit union market manager Mark Hodowanic. "While there might be some general rules of thumb, it’s up to your family to decide what's best."

Many families like to use a formula corresponding to age, such as 50 cents or a dollar per week for each year of a child's life ($3.50 or $7 for a 7-year-old, $4 or $8 for an 8-year-old). A formula has certain advantages over a flat amount, says Leatherman. "The kids get an automatic raise on their birthdays, so it takes away the question of when to increase the allowance," she explains. "And it cuts out sibling arguments, because the younger kid can understand why the older kid gets more."

While many families give allowance weekly, others do it biweekly or monthly. The important thing is consistency. Set up a system to help you remember, so you have the right change and to avoid nagging reminders from your child. On the other hand, don't feel stuck – if your current arrangement simply isn't working, you can always sit down with your child and come up with a different plan.

Do I get some say in what the allowance is spent on?

"What if my kid wants to spend his allowance on fireworks or a pellet gun?" you may be thinking. Don't worry – allowances can come with some oversight. But instead of making a list of banned items, Leatherman suggests setting up general guidelines like, "You can spend your allowance however you like, as long as it doesn't cause a problem." This gives you plenty of wiggle room. If your 6-year-old wants to buy a week's supply of cavity-causing sugar bunnies, simply cite the "cause a problem" clause.

How can I teach my child to save and to share?

You may want to let your child take charge of how much of his allowance to spend, how much to share, and how much to save. That's fine – he's sure to learn from his own successes and mistakes.

Alternately, you can build in guidelines that reflect your values. You can require your child to save 10 percent of his allowance and donate another 10 percent to a charity he chooses. And you may want to divide the savings into "fixed" and "revolving." The fixed savings go directly into the bank, to be reserved for a long-term expense such as college or a car. The revolving savings remain at home with your child, for him to dip into at his discretion. Even if he depletes his stash on a regular basis, he'll still learn firsthand how helpful savings can be in a pinch.

To encourage your child to make thoughtful decisions about money, consider forgoing the standard one-slotted piggy bank in favor of one with separate compartments. Examples are the Moonjar Moneybox and the Money Savvy Pig.

Is it okay to let my child borrow against his allowance?

"Mom, will you get me this toy?" your child begs with puppy dog eyes. "I'll promise I'll pay you back as soon as we get home." What should you do? As long as you're comfortable with the toy and the price, making the short-term loan can be a good lesson for your child. But have some safeguards in place.

"First, have your child sign the receipt," says Leatherman, in case he develops sudden amnesia about the agreement. "And don't give him the toy until he gives you the money." If upon arriving home, he discovers he doesn't have enough to pay for it, keep the toy until he earns or saves up the money. If the money never comes your way, feel free to get creative: The next time you hand over his allowance, include a "bill" for the toy.

What about giving advances?

Your child's best friend invites him to go to the movies, but he's already blown through his allowance. Should you give him next week's allowance early? "If your child is generally responsible with money and you feel confident that he'll pay you back, it's fine to give him an advance," says Leatherman, though it's a good idea to have him sign an IOU.

If you're not so sure, consider requesting collateral. "Have your child give you a possession that's equal in value to the amount he's borrowing," Leatherman suggests. And make sure it's not some broken or long-forgotten toy – the collateral needs to be something he'll want back. Return the collateral when the next allowance time rolls around and he makes good on the loan.

Of course, you can always just say no, especially if these advances are becoming an everyday occurrence. Your child may be disappointed about missing the movie, but he'll learn about the importance of building a "rainy day" fund.

Is it smart to tie my child's allowance to chores?

While many parents tie allowance to chores, Leatherman recommends against it. "Depending on your child's mood, allowance may not be enough to motivate him," she says. In which case, you're stuck with undone chores.

Also, when children get paid for chores, they don't fully experience what being a family member, a team member, is all about. It's important to teach them that all family members have responsibilities to the group. And that's nonnegotiable. Though they may gripe about doing the dishes, the need to contribute in a meaningful way is fundamental.