Should Children Get an Allowance?

We firmly believe that the earlier you teach children how to handle money and make them responsible for their own financial decisions, the better off they will be when they are ready to strike out on their own.

The tools for teaching kids about money include:

• Giving them an allowance
• Expecting them to do chores around the house simply because they are part of the family
• Giving them opportunities to earn extra money
• Monitoring and coaching them as they make both good and bad decisions.
• The primary purpose for an allowance is to enable a child to experience the real world of money management. You can teach, lecture, and allow your kids to learn by observation, but the best way for them to learn is to have some cold hard cash in their hands to use the way they choose.

Research on school-based financial literacy efforts overwhelmingly state that classroom instruction is far too theoretical. Kids need to use real money in real situations in order to learn. And this means allowing them to fail and succeed with you in the background as a cheerleader and coach.

Some people are adamant that money should be given to a child only when they do something to earn it. But the “pay for performance” dynamic makes the child think they have a choice about whether or not to do household chores. If they don’t need money, they may shirk their chores that week.

We think the best solution is a compromise. Give your kids an allowance because that’s the best way to teach them about money. ALSO require them to do certain chores on a regular basis just because they’re part of your family. Even a child as young as three can do simple chores such as making their bed or setting the table. As they get older, additional chores can be added such as taking out the trash, clearing the table, or feeding and walking the dog.

Along with the allowance and chores they are expected to do, give them opportunities to earn more money by doing optional tasks such as mowing the lawn, washing the car, or whatever seems appropriate in your family.

An important key is to keep the allowance low enough that they’re motivated to take on additional chores, but not so low that they don’t have anything to spend.

As a parent, your role is to be a coach and a cheerleader as they learn, make mistakes and have successes. Coach them by asking questions without lecturing or telling them what to do. Ask open-ended questions such as:

• So why do you think that $40 shirt is a good deal?
• Would you rather have one pair of expensive jeans or 3 pairs of less expensive jeans?
• How do you plan to eat lunch at school since you spent your lunch money on video games?

If they decide to spend foolishly, LET THEM! The best way for them to learn is to let them make mistakes and suffer the consequences.  It’s better for them to make a mistake buying a $30 blouse than a $300,000 house! If you act like the First National Bank of Mom and Dad and give them money every time they make a mistake, you are setting a precedent you’ll be expected to maintain, even when they are adults, with a spouse and children of their own.

An allowance presents a great opportunity to teach kids how to give, save and spend so be proactive about coaching them and helping them learn what to do with the money they receive. If they gain experience when they are young and learn how to give and save a percentage of every dollar they receive, it’s likely those habits will stick as they get older and earn more.

Use separate piggy banks or jars marked “Give” “Save” and “Spend” to help them understand the three uses of money. Some people advocate teaching kids a 10-10-80 approach: give 10%, save 10%, and spend 80%. Since kids have few fixed expenses, consider teaching them to SAVE a higher percentage, such as 40%.

When to begin an allowance, the amount and how often they get it is a great discussion for parents to have when the kids are very young, or even when you are pregnant.

Kids can understand certain aspects of money at a surprisingly young age. Researchers have found that children as young as two can begin to see that money is a means of exchange. It’ s an idea they can start to grasp the more they go to the store with you and watch as you hand money to the cashier and then receive groceries or clothing or whatever else in exchange.

When you think about starting an allowance, err on the early side—perhaps as young as three or four, but certainly they should have some exposure to spending their own money when they enter kindergarten.

Common ways to determine an appropriate amount for an allowance can be based on the child’s age or grade. You may want to give a 5 year old $0.50 for each year, making their allowance $2.50 per week. Or you can base the allowance on their grade plus one.  So a first grader would get $1 + $1 = $2 a week.

As for how often to give an allowance, in the beginning, a weekly allowance will provide frequent opportunities to establish the habits of giving and saving. As they get older, gradually transition “payday” to once a month. A monthly allowance helps kids learn to budget their spending so the money lasts until next month. The important thing is to increase the amount along with their responsibility each year.

A few weeks ago we did a podcast titled “Birthdays on a Budget.” One of our suggestions was to use the milestone of each birthday as a natural time to talk about an increase in the allowance and any changes to your child’s financial responsibility. As they get older they need to take on more and more responsibility as you transfer financial responsibilities from your shoulders to theirs.

Like the NIKE commercial says “Just Do It!” Get started now and make adjustments as you see fit and as your child learns and grows. The earlier your kids begin gaining some experience managing money, the better off they will be as adults.

By the time they are seniors in high school, they should be taking on all their personal financial responsibilities—clothes, entertainment, car, school lunch, etc. The only way for them to do that is for you to start training them when they are young. “Train up a child in the way he should go and even when he is old, he will not depart from it.” (Proverbs 22:6)

Listen to the Manage Your Money God’s Way podcast for additional thoughts about how to help your child become a financially responsible adult.