Broker Check

Allowances, Children, and Money

THE EASIEST WAY FOR YOUR CHILDREN TO LEARN ABOUT MONEY IS FOR YOU [THEIR PARENTS] TO NOT HAVE ANY"

-Katherine Whitehorn

That may not be practical, however it illustrates the challenges facing today's parents. Kids are tremendously influenced in their spending habits, as in most things, by what their parents do. Parents who are obsessed by the bragging rights afforded by a luxury car cannot expect their kids to be happy with no-label sneakers.

The author of the "Millionaire Next Door" said it aptly: "NO MATTER HOW WEALTHY YOU ARE, TEACH YOUR CHILDREN DISCIPLINE AND FRUGALITY."

Kids need more than an example; they need experience. That's where allowances come in. Allowances are one of those minefields of child rearing; one that parents must negotiate from around the age of 6 well into adolescence. Parents often complain that kids are full of ``gimme, gimme, gimme''. Yet parents often respond with, `Here, here, here,' thereby creating a long-term problem for themselves and their children. Starting young, with a little money, allowances give children a chance to make mistakes that are not too costly, to think about the value of what they want, to experience anticipation as they save for a few weeks, and even to feel disappointment when they blow the money.

At what age should a child begin to receive an allowance?

Some financial and child development experts suggest allowances should start when a child can ask for things at the store and understands that money is traded for "stuff"; others say around the age of 6 (1st Grade) is soon enough: We believe that allowances should have begun by the age of 10 (5th Grade) (earlier if the child indicates responsibility).

How frequently should allowances be given?

Consistency is critical here, allowances can be given weekly (preferred at the younger ages, after all how often do most paychecks arrive?) or even monthly, but experts warn that parents must remember "payday" and must have the money on hand. Whatever payment schedule you choose, stick to it. Forgetting to pay an allowance does more harm than not giving an allowance at all. You need to model responsibility if you expect your children to be responsible.

How much?

For the younger ages $1/week per grade level (5th Grade = $5.00/wk) may be a benchmark to begin. Parents can tally up how much they already hand out. And tally up what the child is expected to pay for with the allowance: school lunch, or just a cookie after lunch? Movies? Clothing? Sports equipment? Savings? Charitable donations? Gifts? Allowances can help children understand the concept of budgeting and saving, but you have to teach them.

  • A regular allowance helps kids take responsibility for spending decisions and encourages independence. Instead of getting money 'on demand' whenever they want it, children with regular allowances can learn to plan ahead, to anticipate spending needs and make choices about what's most important. Don't give an allowance until children are old enough to manage it. There's no need to rush things and preschoolers generally don't understand the abstract idea of money anyway. Once children start first grade, they begin learning about money in school, so they know if they get a $1 bill each week, its equivalent in value to ten dimes or four quarters.
  • Keep the system simple so you can manage it. Denying kids an allowance doesn't make it easier to limit the amount of money they get their hands on. Because most children will get the money out of parents anyway, it's better to teach them how to manage it themselves than allow them to nickel and dime you to death. Plus, using an allowance gives parents and children more control over the children's finances.

Give children enough of an allowance so they can squander it, but not so much that you'll be upset when they do.
Allowance doesn't depend on a family's financial situation. It depends on how much money parents think kids need access to. Most kids have a limited amount of things to spend money on, no matter what their family's financial situation is. Ask others what they pay but go with your own instincts and values for what you believe is appropriate. Keep allowances reasonable. Overdoing it gives kids the impression that things come too easily; under doing it gives them the impression things come too hard.

  • First-graders need a nominal dollar allowance per week to enable them to learn about spending and saving. As children get older, you should increase the amount depending on the expenses for which you expect them to be responsible.
  • As kids age it's reasonable to increase their budget. For example, besides movie tickets, you might expect your 11-year-old to pay for snacks and games at the arcade, but figure that basic expenses for clothing and school supplies are your responsibility.
  • By the time children reach the age of 15, it's reasonable to expect them to contribute toward clothes, gifts, (especially for their friends) activities, and school related extras such as trips to area attractions, and club related activities.

As children get older (high-school age) monthly allowance payments may be a better strategy. This is a time where budgeting skills are developed. If they spend it all in the first week, the money is gone. Teaching children to budget in their teen years helps save them from the consequences of not knowing how to budget as they get older. It's better to not be able to go to the movies for a couple of weeks when you're 16 than not being able to pay rent or a car payment when you're 25.

Should Allowances be Linked to Chores?

There are risks in linking allowances to chores. It sounds like a good idea at first because we want children to have experience actually working for money, but the problem with this concept is that it undercuts the idea of the family as a team. For instance suppose you're giving your son an allowance for mowing the lawn, but then your neighbor offers him slightly more for mowing his lawn. Does that mean your son should stop mowing your lawn and mow the neighbor's instead? If you think of the family as an economic unit, like a business, then that's what your son should do. But, that isn't how a family should operate. Parents should communicate to children that the reason they need to do chores is not because they'll be rewarded with money, but because they are a member of a family team. Give children a basic allowance that isn't linked to chores but linked to spending responsibilities. The purpose of an allowance to teach your children how to handle fiscal responsibility.

Paying for good grades.

As parents we receive money for working, in the form of salary, bonus, overtime, profits and raises. The harder we work and the better we perform in our careers the reward is usually financial. One of your child's jobs is to do well in school, therefore a system designed to financially reward them for good performance is not substantially different than the one we live in as adults. If you establish this reward system relating to allowances, be certain that there are financial disincentives as well as rewards for the level of performance. These disincentives/rewards should be ironclad in design, and strictly followed.

Some kids will save on their own; in fact some are little hoarders. It's almost hard to get them to spend money. These children may want a savings account with the local bank or credit union to discover how to make their money grow. Kids who don't want to save will need extra encouragement. Require them to save a percentage of their allowance, but try to make saving fun. For example, have them save their money in a fun piggy bank, something simple so they can see their money grow. When they save enough, help them make their own purchases so they see themselves being rewarded.

Another incentive is to match what they save. This can motivate kids, especially if they're saving for something costly. It gives them an incentive to accumulate a certain balance. Parents often want older teens to save for long-term goals like a ski trip, a new car, college or a down payment on a first house.

Parents should involve their children, at an age that makes sense, in family decision-making about finances such as purchasing a new vehicle or saving for a vacation. If you're setting money aside for a long-term goal such as buying a house or a new car, involve your children. If money is invested in the stock market, let your children know so they learn about the stock market. Be open about finances. Each parent will determine how much of the family finances will be shared with the children and the age which this is appropriate.

Allowance isn't a one-size-fits-all issue. It's something parents and children alike will need to work through. The important thing is communication. That's how kids learn these financial skills.

Have a Question?

Thank you!
Oops!