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Tie the money to grades, chores, and behavior. This gives kids an incentive to do the right thing, but critics argue that tying an allowance to these actions sends the wrong message. Kids should strive for good grades regardless of what (or whether) they're paid for doing so, they argue, and doing chores is simply part of being a family member.

Give the allowance without expecting anything in return. Using this method, kids learn about money even if they don't make good grades or do their chores. But critics worry that it creates an "entitlement mentality," meaning the kids expect something for nothing.

Most families are probably best off with some sort of hybrid approach: Provide a minimal base allowance that's paid without expecting anything in return, and then add "commissions" for certain chores and behaviors.

Tip

Instead of paying for good grades, consider giving something else your child values: a later curfew, a trip to a pro sporting event, golf lessons, more time with friends. This encourages the behavior you want without tying it to money.

However you distribute it, use the allowance as a chance to teach kids the value of money. Instead of just letting them spend it on whatever they want, consider a system that divides the money for specific goals. You might, for example, use three jars (or envelopes) labeled like this:

Save (30%). The cash in this jar is for long-term goals, like buying a bike or baseball mitt. Let the child decide on the goal—with your help.

Share (10%). This money is for giving to someone else. Your kid can decide where it goes—whether it's a charity or just somebody else in need (even a sibling!)—but the point is to share it with others.

Spend (60%). There are no restrictions on this money. Your child can spend it on books or bubblegum—whatever strikes her fancy.

For example, if you pay your kids a weekly allowance equal to 50 cents per year of age, you might have your 6-year-old (who gets $3.00 per week) put 90 cents into Save, 30 cents into Share, and $1.80 into Spend. As long as your kids follow the rules for each jar, let them make their own choices and mistakes. It's better for them to learn a lesson now with $10 than later with $10,000.

Note

You can read more about segmenting allowances at Get Rich Slowly: http://tinyurl.com/GRS-allowance. A company called Money Savvy Generation makes a special piggy bank (http://tinyurl.com/money-pig) that has slots for Save, Donate, and Spend, and even one for Invest.

Your Money And Your Life: Making the Most of a Windfall

Once in a while, you get lucky: You win the Super Bowl betting pool, get a bonus at work, or unexpectedly inherit a fortune from a long-lost aunt. It can be tempting to spend these windfalls on fun stuff—it's "extra" money, after all—but doing so can be a huge mistake. If you receive a windfall of a few thousand dollars or less, follow these guidelines:

Let yourself spend 5% of it on fun. Treat yourself to a fancy dinner maybe, or buy that collector's-edition DVD set you've been wanting.

Use the rest to pursue your financial goals. If you're working on a debt snowball (see Getting a Free Credit Report), use the windfall to knock off another big chunk. If you've set up a targeted savings account (Targeted Savings Accounts) for a down payment, put it there. If you have a Roth IRA (Learning to Love Roth IRAs), put it there.

The important thing with small windfalls like these is not to fritter them away. It's easy to spend them on things that don't matter in the long run. So give yourself a small treat and then be smart with the rest.

With a big windfall, such as an inheritance, first set aside enough to cover any taxes that haven't been withheld. (You'll be able to afford a tax professional to calculate this for you—it's worth hiring someone to do this.) Then, let yourself spend up to 5% on fun. If you have debt, use the windfall to pay it off; as unglamorous as it sounds, it's the best course