One of the very best things my mother did for me was to give me an allowance in a way that really taught me how to handle money. I don’t have any expert credentials in the field of giving kids an allowance, but it’s saddened me over the years to see how many young adults really don’t get basic ideas like savings and interest, let alone the more complex stuff.
Part of the problem is that parents themselves often lack skills in this area. I’m so grateful for what my mother passed onto me that I want to share her methods with you. My life has not always been financially easy, but with the skills she taught me, I always kept my head above water and never needed a bailout.
What an allowance can teach
I first started receiving a weekly allowance when I was six years old. It was sort of unconditional, except I was expected to save 10% toward a college fund and give 10% to charity.
Before then, I had thought my mother was the sole arbiter of what I could own or not own. Now, for the first time, I had the power to buy what I wanted. At first, I bought silly stuff like candy. Then I would want something nicer, like books or toys, but didn’t have the money. My mother explained that I just had to save my money for a few weeks instead of buying candy. Bingo! The college savings had been kind of abstract to me, but the idea of saving for three weeks for a toy taught me the power of saving. To this day, I love putting money into savings.
There is no one right answer to how to give an allowance. What matters most is that you discuss money with your child. Guide them through making decisions about it. Help them learn to think about it like adults do.
How much should you give them?
There’s no exact right answer to this question. Some experts suggest about $1 per year of age. Others say 50 cents per year of age. It depends on many factors (cost of living in your area, what your child shops for, how much spare money you have, etc.), but you’re aiming for an amount that will let your kid buy cheap stuff immediately, but force them to save up if they want nicer things. That’s the sweet spot.
Putting conditions on kids allowance
I don’t think you should give your kids an allowance without any strings attached since money rarely comes that way when we’re adults. You’re trying to prepare your kids for adulthood, and also teach them values like compromise, delayed gratification, and how work brings money.
So what conditions should you put on it? The answer may surprise you.
Don’t tie it to chores or grades
This seems counter-intuitive, if you think the point of an allowance is to teach a child what working for money will be like. But there are two problems with this approach.
- As adults, your kids will have to take out the trash without being paid for it. They need to learn that adults do a lot of things just because they’ve got to be done.
- You could set up an unhelpful bartering situation. Unlike an employer, you’re not going to fire your child if she doesn’t do her chores or make good grades. Tying allowance to chores could encourage your child to decide “Fine – I’ll skip the chores and you can keep your money” or “I won’t do anything unless you pay me.”
Experts recommend making chores and grades a separate issue: expect your child to do chores just because she’s a member of the household. Expect her to make good grades because it’s in her best interest.
Make a rule that your child doesn’t ask you to buy her anything
Because I got an allowance and had full discretion over what I could spend it on, the trade-off was that my mother wouldn’t buy me things except on gift-giving occasions, and I wouldn’t ask. This taught me financial self-reliance and made me appreciate gifts more. Occasionally my mom surprised me by springing for something special, like a ticket to a concert that I hadn’t known about in time to save up for. She also sometimes matched my savings when I was saving up for something really expensive but worthwhile, like a musical instrument. But I never ever had the idea that if I needed money, I could just ask someone to give me some. I’ve known young adults who still ask their parents to buy them things. Don’t get that started.
Part of why I love saving money was seeing the interest I earned each month. Back then, interest could be 5-10%. Sadly now, it may be harder to excite kids about it, since the interest rates are so low (check out CapitalOne360 for some of the best interest rates available). Holy guacamole – the bank paid me to keep my money there? Now I thought this whole savings thing was brilliant! And all I had to do was exercise some self-discipline and delayed gratification, so this taught me those things, too.
When and why to give raises
Raises are appropriate over time. I haven’t come across a lot of expert advice on this. My raises were tied to my changing shopping habits (graduating from cheap toys to more expensive books, clothing, etc.) I got something like a performance review with my raises: my mother would comment on how I’d been doing in school, or how I’d been behaving. If I’d been falling down in any of those areas, I was told the raise should inspire me to do better, and it did.
Don’t make your kids pay for their basic necessities
I’ve seen parents make their kids spend their allowance on basic school clothes, grocery items, hair cuts, and school supplies. The problem here is that this is stuff you would have to buy if your child doesn’t, and he may figure that out and decide to let his hair grow until you get desperate enough to pay for his haircut yourself. Or he may get his hair cut in a way you object to. If you pay for these necessities, then you get to make sure he gets the right stuff. And it’s a great opportunity to teach him bargain shopping.
Now, that said, there came a time when I wanted to buy every hair care and makeup product I saw, plus some pretty impractical clothes. I had to pay for that out of my allowance, which is fair. I also paid for outings with friends – concert and movie tickets.
- Start with a weekly allowance schedule, because for young kids, a week is a long time. Once they’re teenagers, you can switch to a longer schedule (bi-weekly or monthly). This can teach them budgeting. (I can’t get over how many adults I know who get a paycheck, splurge on it immediately, and then live on ramen noodle cups for the last week of the month. It doesn’t have to be like this.)
- If you want to teach your kids about working for a living, give them assignments they can do for extra money – none of which has anything to do with their routine chores or allowance). This teaches them the concept of doing something and getting paid for it. It’s probably smart to save this exercise until they’re about 10, so they’ll fully understand the difference between their allowance and their ad hoc wages.