How to use an allowance to teach children about money

Allowance is a child’s original finance teacher.

As a parent, you give your child money and the child determines what to do with it, along the way learning about planning, budgeting, opportunity cost and value. It’s a life lesson that’s been passed down for generations and it remains a powerful way to give children a hands-on way to understand money.

Determine your allowance method

Many financial experts argue that giving an allowance untethered to actual work is not productive (and one expert goes so far as to call it “cruel” because it is such an inefficient way to teach), but it is still a popular way to handle allowance. There are multiple methods to consider.

• Regular allowance that requires no work: Children receive money every week, bi-weekly or every month and determine how to spend it. With this method, planner Elizabeth Kiss says that regularity is more important than the amount, so children can learn how to plan for and manage their money.
• Regular allowance attached to specified chores: Parents lay out expectations that children must fulfill to receive allowance. These should be clear, trackable tasks and if the child does not complete them, he or she cannot receive an allowance at all.
• Allowance as commission: Financial expert and author Rachel Cruze offers another variation on allowance. Treat it like a commission by attaching a price to each chore and paying for production. This may give children an added incentive to work harder when they want more money, imparting another life lesson.

With each method, parents should consider how the whole lifecycle of the plan. How will raises work? Are they attached to age, additional workload or more advanced work? Are bonuses available (for example, good grade bonuses)? The more thorough parents are with their allowance plan, the more prepared they will be to focus on the real purpose of the allowance: Teaching children about money.

Help them understand money management

All the while parents are setting up and executing the allowance program, they are talking to their children about budgeting, setting savings goals and designating a portion to helping others. Several experts recommend ensuring your child divides allowance (and perhaps any other received money) into three jars or categories: spend, save and share.

• Spend is available for whatever children want to buy. This might be a good way to quelch all the requests for snacks at the grocery store! You want it, you buy it. Just remember to prepare children for taking money with them to the store or paying you back as soon as you get home.
• Saving is for larger ticket items. Think a $10 toy that requires some time commitment, but not so much time that the child loses interest. For a noble savings goal, you could offer to match the child dollar-for-dollar as an added incentive that helps them get there faster. Consider putting this portion in a kids savings account right away or at the culmination of a month, so they get in the habit of regularly putting money into their savings, and creating a chart that shows how much money they have in savings, so they can see it grow.
• Share is meant to help others or provide as donations. If your child likes dogs, for example, he or she could donate to an animal shelter, and you could even take the cash to shelter each month to tie their donations to real-world causes.
• Some experts suggest invest as a fourth category, which could be applicable for older kids or teens.

Consider the details of your allowance program

Children as young as three can understand basic money concepts and could benefit from an allowance. However, as the child gets older it may be appropriate to start adding bills into the mix. If your child wants some a subscription service, for example, paying that bill or a portion of that bill every month, regularly, before they get paid helps set them up for a successful understanding of bill pay later on. As they become teenagers, you can look into teenager checking accounts or even credit cards for them.

Finally, parents must decide what children should cover with their allowance and what parents will continue to fund. The American Institute of CPAs ran a survey on allowance and found that “parents who give kids an allowance are more likely also to pay for things their children want, like downloads, movie rentals, cell phones and hobby-related items.” Parents need to designate certain categories of things as “wants,” not “needs” and expect children to cover the costs. Otherwise, the allowance isn’t quite doing its job.

At the end of the day, or the pay period, consistency is key — as it is with so many things when it comes to kids. There’s a lot to learn about money, but if they know that money is coming in and they must learn to manage how it goes out, they will begin to understand how to meet their wants and needs without begging mom and dad.

Other money management lessons for kids

• How to teach kids about money
• How to teach kids and teens about debt
• 6 tips for teaching teens how to use credit cards
• Teaching teens about checking accounts