As a kid, I didn’t receive an allowance, but I learned to manage my finances by learning from the good example set by my parents. As a financial planner I can see the value in using an allowance as a great teaching tool: opportunity cost (if you buy this, you don’t have the money to buy that), needs vs. wants, delayed gratification and a thousand other lessons.
Here’s a hit list of some of the best ideas I’ve learned regarding the topic of allowances:
--Around age 5 or 6, consider giving an allowance of maybe $1/week. Customize the amount for what feels reasonable given your finances and increase it as they get older. Maybe even give them a pretty sizeable allowance once they hit their teens, but force more spending decisions on to them. For example, mom and dad will give you this much to buy nice, mid-range tenni-runners, but if you choose to use part of your own money you can pay up for the Nike Air Max+ kicks.
--Use 3 jars: giving, saving and spending. Make the allocation to each jar fairly realistic, although since kids have no real expenses to cover we have to exaggerate each category a bit. For example, maybe 20% to giving, 30% to saving and 50% to spending. (Tip: by paying $1/week in dimes you can help them easily allocate their allowance).
Giving. This helps them learn to be charitable and shows them the good things money can be used for. Help them think through giving to your church, local animal shelter or other organization that interests them and that they feel good about helping out.
Saving. This helps them learn to delay gratification and see how money builds over time. Encourage them to earmark part of their savings for a “big” item that they have to save for over time.
Spending. This is money they can spend on most anything they want. I realize 1/2 of their allowance seems like a large amount to allocate to the spending jar, but if you force them to give and save the majority of money they get, they’ll likely become disinterested. Learning (from their mistakes) will happen by spending so they need a decent chunk of change in their spending jar.
--Don’t tie the allowance to family chores. As a member of the family, everyone should be expected to do their fair share. Tying an allowance to chores gives the child the option of ignoring their chores. Sure, they also lose their allowance, but if this happens the whole system falls apart and the opportunity for learning is lost. It’s okay to provide an opportunity for the child to earn extra money by doing optional jobs, but don’t directly tie their allowance to everyday household chores.
--Sit back and have fun watching them learn how to make responsible decisions about money!
Of course this is a very personal decision and as I alluded in my opening sentence, I think teaching by example is probably more important than anything, but I think this system can teach some very important lessons to children. After all, what parts of our lives aren’t touched by the decisions we make about money?