The Ultimate Guide to Giving Your Child An Allowance
Why Should Parents Give An Allowance?
If you are looking for reasons why parents should give an allowance, look no further than the latest headlines.
- Outstanding student loan debt reached an all-time high of $1.41 trillion in 2019.
- 75 percent of Americans are winging it when it comes to their financial future
- Year over year, money is the number 1 cause of stress among Americans
More debt, less planning, and more stress. All of these headlines are due to a growing lack of financial literacy. Financial literacy is just a fancy way to say an understanding of how to make informed financial decisions
Poor financial literacy skills lead to people of all ages spending more on fees, saving less, and in general, making financially poor decisions. On the opposite side of that coin, in addition to having higher savings rates, and paying less in fees, 87% of Americans agree that ”nothing makes them happier or more confident than feeling like their finances are in order.”
What do any of those stats have to do with an allowance? Experts believe that “allowances are powerful tools” to teach the basics of financial literacy to children. They note that allowances provide your children with hands-on opportunities to make choices that will directly impact their financial knowledge.
That leads to the obvious question of how effective are allowances at teaching the skills required to manage money. With all the fuss over allowances, you would think that question would be an open and shut case. But surprisingly, there has been very little hard research to back allowances as a successful means of cementing financial principals into our young ones’ minds. Denise Cummins, Ph.D. and author of Good Thinking, The Historical Foundations of Cognitive Science, and Evolution of Mind combed through the literature for an article in PsychologyToday.com. She was only able to find one of purport published 1991 that demonstrated that “receiving an allowance did impact children’s financial responsibility.”
She was only able to find one study of purport published 1991 that demonstrated that
… children who get allowances are more sophisticated about money than those who do not.
Even with the lack of scientific evidence, we can use common sense and analogies to make a case for allowances. Managing money is complicated. It requires not just basic arithmetic, but also psychological discipline. The ability to delay gratification, manage the feelings of both being better off than some, while also having less than others, all while balancing your wants against your needs. And that doesn’t even start to include the nitty-gritty of managing debt, investing, budgeting and all the other aspects of money management.
How do we teach complex tasks to children? Do we show them a piano and expect grand performances? Do we provide them with a car and expect them to know how to drive? Of course not. When your child first starts to learn to drive, they begin with the theory. But that is not enough to get behind the wheel. They need you sitting beside them. You are there to coach them. You start in a safe place, like a parking lot at first. Eventually, you begin to take some side streets, increasing the complexity bit by bit. Once they have shown their competence, they are ready for the main event, major main roads and highways.
Giving your child an allowance is very similar. You start with small amounts of cash; that is their parking lot. It is a safe, confined space to make mistakes. You are right there beside them, ready to coach them. They are still holding the wheel, making financial decisions, but poor judgment now will not cause their credit to tank or creditors to start calling. As they demonstrate more competencies, you increase their responsibilities. Soon they will be managing a budget of their own. But only after they have shown mastery of the necessary skills.
An allowance is a powerful tool when used correctly. But providing your child an allowance alone is not sufficient to teach financial literacy. Your kids need you sitting beside them to coach them. For example, a 2019 survey conducted by the American Institute of Certified Public Accountants showed that while the vast majority of parents, 92 percent, agreed it is “very important for their child to understand how to effectively manage their money,” only 3 percent of children are saving a portion of their allowance. Also, little more than 3 in 10 (32 percent) parents are teaching their children about money monthly or less, that is including 7 percent that never talks to their kids about money”. Those percentages demonstrate an unfortunate lack of engagement on the part of parents.
The allowance plus your guidance is required if you hope to teach your kids life skills that they will need as an adult. With the combination of allowance and coaching, there are no other tools that can make the same impact on a child’s financial literacy education.
Allowance for Chores?
There is no bigger controversy when it comes to allowance giving. “Should an Allowance be tied to Chores?”
The short answer is no. If you want to know why ask yourself what the purpose of an allowance is.
As I noted above, allowances are a great tool to teach financial literacy to children. But many people disagree that that should be the only goal. Some want to give allowances to teach work ethic.
The thinking goes; how else will my child learn the value of a dollar if I give them money for free? They need to work for it, just like I do.
Here is the problem with this approach you are building a trap for yourself.
The Pay for Chores Trap
- You can force your child to work without compensation (which was fine before you started to pay them, but now they will claim it is forced labor, akin to slavery),
- You can let your child stop working, tasks around the house go undone, and there are no real ramifications to your child (you can’t fire your kids from your family)
“…if students get a prize for reading three books, many won’t pick up a fourth, let alone embark on a lifetime of reading”Extrinsic motivation limits creativity, enthusiasm and dedication. Intrinsic motivation, on the other hand, can fuel internal drive, mastery and ingenuity. That is not to say that extrinsic motivation doesn’t have its place. There is a lot of evidence to show charting with rewards can be an effective means of short-term motivation to build good habits. But do not create an allowance chart for kids. If you are hoping that the use or absence of money will keep your kids in-line doing their chores, you may find yourself in the Pay for Chores Trap. I know trying to create an intrinsic motivation to finish homework can be a challenge that even I don’t have a solution to, I have to concede that it is the better method for developing well-adjusted adults. You cannot be a parent and a boss. If you are trying to teach work ethic, help find your child summer or afterschool jobs. A real boss will ensure your child understands work ethic. Money as a motivator only goes so far. On the contrary, it may harm your attempts to build a strong work ethic. Don’t fall into the Pay for Chores Trap. If you need to take something away for incomplete chores, take away a privilege. They should get their allowance regardless of the tasks they complete. The money they receive is their chance to practice only management. Just as you would still have your child go to piano lessons if their room was a mess, allow them to practice handling money even if their socks are always on the floor. Do not take away essential practice time, and don’t tie chores to allowances.
What is the Appropriate Age to Start an Allowance?
The sooner you start, the better. The more time you give your child an allowance, the more time you give them to learn as much as possible. Also
“The sooner they learn, the more likely it will stick when it matters most,”
says Eric Pucciarelli, the Vice President of oXYGen Financial.
When determining when your child should be given an allowance, consider these two factors: interest, and ability.
If a child is showing an interest in money or as Kristan Leatherman coauthor of Millionaire Babies or Bankrupt Brats? puts it,
“The best time is when your child begins to understand that money can buy him things he wants.”
Don’t forget, kids also need to be able to do some basic math. Kimberly Palmer, the author of Smart Mom, Rich Mom believes you should start
“as soon as they grasp the concept [of money].”
The goal is to keep their interest and to hone their skills. If the interest is there, but not the ability, keep them engaged by including them in financial discussions until they are ready to do the math required.
If they are not ready at age five, do not force the issue, wait until they can do the math required to handle money on their own. Keep in mind that dealing with coins involves an understanding of fractions. But even without a full grasp of fractions, you can start the practice. Usually, around seven years – Grade one, they have acquired the necessary arithmetic skills they will need.
If your 4-year-old is showing an interest in money and they can distinguish between the different dollar and coin dominations, then, by all means, start providing your little one an allowance.
Lastly, if you are reading this and you have a preteen or teenager, and you haven’t started giving your child an allowance, it is not too late! Remember, an allowance is a safe place to practice money. Getting some practice will always be preferred to no practice at all.
How Much Should Kids Get for Their Allowance?
You will have to determine what works best for your family.
How much you give depends a lot on your financial situation, how many kids you have etc. So only use the following as guidelines.
Don’t let the following suggestions discourage you from an allowance and don’t stress over how much.
Remember, the intent is to give your child practice using money.
To find where you can find money to support your child’s allowance read the “What Should Allowances Be Used For” section below.
Weekly Allowance Amounts
Most parents give either 50 cents or one dollar for every year of age weekly.
So, a 7-year-old child could receive a weekly amount of $3.5 or $7, respectively.
Moneyroster.com 2019 survey shows the average allowances from ages 4 – 14. As you can see, the amount is in line with the 50 cents – $1 amounts noted above.
In our family, we have gone with the $0.50 approach but rounded up. So, my 7-year-old is receiving $4 per week. We wanted to start low so that we had wiggle room to increase the amount as my child grows, and his wants and needs also grow.
A few other things you should consider when determining how much to give:
- Will the allowance be used to cover necessities such as lunches, clothing gifts for friends? (See guidelines below for more details)
- Can the amount be easily divided into savings/giving/spending “accounts”?
- What will your child be buying? Will they be able to save up for their significant wants with the allowance they receive without getting discouraged? (Don’t forget to factor in any additional money they may receive from working or birthday gifts when doing this calculation)
Allowance Use By Age
This is where a lot of parents get tripped up when giving thier child an allowance. Allowances are not “extra money.”
Allowances should replace one or more of your current budget lines. In other words, rather than you buying stuff for your child, you should provide them with money to buy for themselves.
For example, carve out some money from your grocery budget, and have your child manage their lunch budget. Your child should be using their allowance to buy what you would have been buying for them.
Toys, lunches, clothing, personal hygiene are all items they could be purchasing for themselves. While they do, they will be learning how to budget, and stretch a dollar. Let them keep what they don’t spend so that they can reallocate money to their priorities. So, if they want designer jeans and are willing to eat a month’s worth of peanut butter and jelly to sandwiches to buy them, let them.
The key is that you cannot bail them out with extra money or by buying for them. If you want your child to learn money managing skills, you need let them figure it out. You will find your children are much more economical when they have to spend their money on themselves. The beauty of this is that you do not need to find “extra money” to support the allowance; it is money you were going to spend on them anyways.
As your child becomes more comfortable with money, they should be able to take on a more significant share of the purchases for themselves. By the time your child is in their late teens, they should be managing most of their purchases. That, of course, will not be where you start with your 5 and 7-year-old, but this is where you need to end up. Let’s take a look at the differences in allowances by age.
Allowance for Ages 5 to 9-Years-Old
When you are first starting your allowance practice, especially if you start with children younger than 10, you will find the focus will be on toys and maybe treats.
Remember you are giving your child an allowance in part to empower them; to allow them to make choices. You can and should put some boundaries around their choices, but not so much that they do not feel like they can buy what they want.
One tool that can ensure some boundaries is a “Do not buy list.” Do not make this list overly long or complicated, and you can always add more to it later. For example, our list only includes two things: treats (gum, candy, chocolate, etc.) and toy weapons (guns, knives, etc.). But as my kids get older, it may include inappropriate clothing or violent video games.
Allowance for Ages 10 to 14-Years-Old
By this stage, if you have started early, you can start to transition that discretionary toy budget into something more tangible. Maybe a lunch budget that your child needs to manage. Around nine years old is the prime age to begin increasing purchasing responsibilities.
Make sure you are increasing their allowance as they age. Also, make sure that you continue to focus not just on spending but setting and hitting savings targets. Saving is a critical part of managing money, and your child will need your support to master that skill.
Allowance for Ages 15 to 17-Years-Old
By this age, I would no longer consider this an allowance per se. If you started early and your child has mastered many of the allowance skills by this age, they should be receiving a monthly budget. It may be a good time to switch the weekly pay to a bi-weekly payment to help them get used to standard pay periods.
While you will still likely be providing them with breakfast and dinners, they should be managing their lunch, clothing and hygiene budget and any discretionary spending.
If they find that the amount they are getting from you is no longer sufficient, encourage them to get their first jobs. First jobs are opportunities to develop the work ethic that we hope they carry into their careers.
About More Than Spending
Don’t forget that an allowance should not just be about what your children can buy for themselves. A portion of allowance money should be set aside for donating.
Why donate? Giving is essential in both developing financial skills and contributing to well-being. Paradoxically giving makes you feel wealthy and happy. Additionally, if your children focuses only on spending money, they may become shallow and self-centered.
Giving provides an opportunity to think about the privileges we have while also contributing to solving big problems. Just as you help your childen set savings targets, help your children find and donate to a charity that resonates with them.
Guidelines in Less Than 12 Steps
Here are 11 steps to follow to start your allowance practice.
1. Define your frequency and be consistent. Start with weekly and move to bi-weekly when your child is in their teens. That consistency will give your child a chance to start budgeting and saving regularly.
2. Define the amount. Try to make it enough to start making small purchases, but not so much that they don’t have to save for the big stuff.
- Have a place for them to keep their money. Forget about the piggy bank and use clear jars so your little one can see their riches grow. Label the jars spend, save, and give. The three jars method is an easy way to start teaching the concept of accounts and budgeting
- Explain to your child why they are getting an allowance: to practice using money. A skill they will need for the rest of their lives.
- Have your child agree to your Do Not Buy list.
- Let your child know that they will not be getting more money outside of the allowance. If the allowance is for lunch or clothes, they need to make it last.
- You can lend your child money to get them into the habit of paying bills, but as a rule, try not to lend them more than one week’s allowance. Make sure they pay it back.
- Help your child define savings goals. Remember to reset savings goals once they meet the target.
- Help your child find ways to donate a portion of their allowance.
- Let your child know what, if any, behaviour will cause the allowance to stop.
- Use the allowance (the giving, the buying, the saving and everything in between) as teachable moments. The allowance alone is not sufficient to learn the skills required to manage money.
Cash Before Credit
While the world may have gone digital, allowances should start with cash.
There are countless apps and ways to make giving allowances convenient for parents. But your convenience is not the purpose of the allowance.
Why Cash? It is tangible. A child can see how much money they have, and interact with it.
If their money jars are empty or overflowing with cash, they will have a better understanding of what they have than digits on a screen.
While the world may have gone digital, allowances should start with cash. There are countless apps and ways to make giving allowances convenient for parents. But your convenience is not the purpose of the allowance.
Why Cash? It is tangible. A child can see how much money they have, and interact with it. If their money jars are empty or overflowing with cash, they will have a better understanding of what they have than digits on a screen.
The other advantage of cash is the cognitive connection made when a child exchanges physical money for a good or service. Making that mental connect and experience the feeling associated with that transaction is a necessary part of understanding personal finance. Transacting in cash makes that connection happen quicker.
There is no end to the great apps and cards out there designed to help you manage allowances. MyDoh, RosterMoney and Greenlight have been receiving some excellent reviews. But do not go digital too early, have your children master cash, before cards or apps.
Once you have started giving an allowance, stay consistent.
Stay positive and give your little one the freedom they need to experience all the highs and lows of buying, saving and giving.
Do not be overly regimented. Don’t forget the purpose of the allowance is to let them take the lead.
Allow your children to make mistakes. We can learn more from our mistakes than our successes.
Losing money, buying something cheap rather than delaying gratification for the well-made version, or losing a toy that was not adequately secured, are all aspects of having and using money. So, don’t deprive your children of these moments. Their small losses now will protect them from more significant losses later.
Once you have started giving an allowance, stay consistent, stay positive and give your little one the freedom they need to experience all the highs and lows of buying, saving and giving. Do not be overly regimented. Don’t forget the purpose of the allowance is to let them take the lead.
Don’t let the learning stop after your initial conversation. For allowances to be beneficial, it requires both the exchange of money but also the exchange of knowledge, therefore remain an active participant in the allowance process. Help them set savings goals and find worthy causes to donate to. Use all aspects of the allowance as teachable moments to keep the conversation about money going.
Last take away. Giving your children an allowance is a fantastic gift, but it also requires that you give up a lot of control. Up until this point, most parents would have had all of the buying power. The allowance equalizes this power disparity a great deal. Don’t let that dissuade you. Remember, we are raising adults. The goal is to get them to be self-sufficient members of society. We need to empower our children, and this is an excellent method to do so.
Need more tips for talking to your kids about financial literacy, go to CliftonCorbin.com or subscribe to my newsletter.