Allowance as a teaching tool

Often kids are ready for an allowance in elementary school. Giving kids an allowance provides them with an important opportunity to learn and practice money management skills they’ll need throughout their lives. On a small, manageable scale, an allowance lets them make their own decisions and their own mistakes — and live with the consequences.

Because the idea behind an allowance is to let children practice money management skills, many experts advise parents not to link the allowance to the child’s behavior or a list of chores. Parents can take away a privilege (for example, a ride to the mall) if the child misbehaves, but frequently docking the allowance takes away the child’s opportunity to learn about money management. Consider making routine chores part of your children’s responsibility as family members, but give them the opportunity to earn extra money above their allowance for tackling special projects. If you decide to use the allowance as a payment for chores, be clear about what’s expected and keep your agreement.

How much of an allowance?

Some advisors recommend a simple system for determining the allowance amount: a dollar a week for each year of the child’s age (e.g., $10 for a 10-year old child). Others recommend that you determine an appropriate allowance amount by making a list of what you buy for your child in a typical week and how much you spend. Consider an allowance in an amount sufficient to cover essentials and discretionary items. Be specific about the essentials the child will need to handle.

Allowance guidelines

Rather than giving them the idea that the allowance can be spent any way they like, you may want to introduce three jars: one for spending, one for saving, and one for sharing (or donating). Talk about why each is important. Talk about spending responsibly, why it’s important to save, and why it’s important to give to others. (Giving the allowance in $1 bills makes the money easy to divide.)

Spending

Help your child to create a personal budget and map out a spending plan. Separate essentials, such as lunch money, school books, and haircuts, from discretionary items such as CDs, magazines, and sodas. Also, set guidelines for what items, if any, are “off limits” for allowance spending. Be sure to pay the allowance consistently and on time. Separate essentials, such as lunch money, school books, and haircuts, from discretionary items such as CDs, magazines, and sodas. This approach will help the child recognize the difference between needs and wants and set spending priorities.

Saving

Encourage your children to routinely save part of the allowance they receive. Help them understand that since no one knows what the future will hold, it’s smart to have savings. If they set money aside immediately each time they receive some, they won’t be tempted to spend it. Setting financial goals and making choices about how to spend money helps children build and reinforce financial skills.

Sharing

Encourage your kids to make a habit of giving to charitable causes. Ask them to consider what causes they care about personally and how they would like to make a difference in the world around them. Save solicitations you receive in the mail and ask your kids to help decide where your family should make donations. Also, encourage your kids to volunteer and consider volunteering with them. Volunteering can be a powerful experience for both parents and kids in terms of recognizing community needs and the benefits of giving back.

Questions to consider when setting allowances :

  • Should an allowance be tied to chores?
  • How much should an allowance be?
  • What rules or guidelines should I put on how to spend an allowance?