When it comes to paying kids an allowance, there’s a lot of disagreement over the best way to go about it. When to start paying allowance, whether to tie it to chores, and how much to pay are all matters up for debate.
There’s one thing, though, that financial experts agree on and studies support: Giving kids an allowance is a great way to teach them how to handle money.
I’ve been paying my daughters, who are 9 and 11, an allowance for years and am starting to introduce the concept to my son, who is 4. Have I handled it perfectly every step of the way? No. But neither have my kids — and that’s the point.
Giving children an allowance “lets them make choices about how to spend, save and share and live with the consequences,” said Robin Taub, financial consultant and author of “A Parent’s Guide to Raising Money-Smart Kids.” “It also gives them an opportunity to learn from money mistakes when the stakes are low.”
Although the majority of parents pay their kids an allowance, 30 percent do not, according to the T. Rowe Price 2015 Parents, Kids & Money Survey. If you’re among them, do your kids — and yourself — a favor and start giving them a chance to handle money on their own.
Why You Should Give Your Kids an Allowance
At an early age, kids pick up on the fact that money buys things. When they want something, they ask Mom and Dad to open their wallets, pull out their money, and buy it.
“It is always easier to spend someone else’s money,” said Steve Repak, a certified financial planner and author of the “6-Week Money Challenge for Your Personal Finances.” “But when you have to spend your own money, the decisions you make may be a lot different.”
It’s important for kids to start making those decisions at a young age and learn to not rely on their parents’ deep pockets. An allowance makes this learning experience possible.
How Allowance Money Can Help Your Kids Long Term
The T. Rowe Price survey found that parents who give kids an allowance are more likely to have kids who say they understand the value of a dollar. Kids who are paid an allowance also are twice as likely to feel that they are smart about money and are more than three times as likely to say that they are knowledgeable about managing personal finances.
“Money is its own language and probably one of the best tools you will ever come across to teach your kids respect, responsibility and self-reliance,” said Mary Hunt, author of “Raising Financially Confident Kids” and founder of Debt-Proof Living.
Plus, giving kids their own money can help end their pleading to buy them things and help prevent other fights over money as they get older. You can tell them that if they want something, they can pay for it with their allowance.
When You Should Start Paying an Allowance
Taub said you can start giving your child an allowance as early as age 5, but your decision to start paying an allowance can depend on your child’s level of understanding about money.
My husband and I started giving our oldest daughter our spare change when she was 4. It wasn’t a formal allowance, but she loved being able to collect coins from us and stash them in her piggy bank. A few years later, we started giving her and her younger sister a set amount each week.
One rule of thumb is to pay 50 cents to $1 per year of age per week, Taub said. So a 7-year-old, for example, would get $3.50 to $7 a week in allowance. “But it’s really up to the parents as to how much they can afford and what they want to give,” she said.
Just make sure it’s not extravagant. “If you give a kid so much money to manage that they can buy everything they want, that defeats the purpose and does not point to what life will be like when they are on their own,” Hunt said.
How to Pay: Structuring a Child Allowance
Having a variety of ways to approach paying allowance means there is also a lot of disagreement over which is the best method. “Some parents want their kids to understand what it takes to earn money, so they tie allowance to household chores,” Taub said. “Other parents want their kids to do chores out of a sense of family responsibility and feel that paying them to do this sends the wrong message.”
Some parents choose a combination approach that involves paying kids a basic allowance that’s not tied to chores as a money-management tool as well as giving kids the chance to earn more money by doing chores beyond the ones they’re responsible for as a member of the family.
Initially, my children’s allowance wasn’t tied to chores. But my husband and I have since changed our approach. Our daughters are required to do certain chores — without pay — as contributing members of a family, such as cleaning their rooms, feeding the pets, changing the cat litter and setting the table. To get paid, they have to do additional chores — and they’re both motivated to work because they have to shell out their own money to buy treats, toys and nonessential items.
Help Your Kids Learn How to Pay Bills
Hunt paid her two sons — who are adults now — a set amount that wasn’t tied to chores on the first day of the month. If they failed to do a chore that was required of them, however, then they’d get a citation and have to pay it out of their allowance — or salary, as she called it.
They were required to save at least 10 percent of their salary, give 10 percent and use the rest to pay for certain items. By the time they were in high school, they were getting $350 a month, but they had to pay for practically everything they wanted, other than food and shelter, she said.
“While there are lots of allowance models out there, I would encourage families to make their own, depending on how many kids they have, their family income, and so on,” she said. But parents should stick to a few key principles regardless of the payment model they use.
4 Ways to Make Allowance Easy and Effective
Whether you choose a monthly, weekly or daily allowance, you can simplify your system in a few ways to make it effective for you and your kids. Using some proven strategies, you can create a system that will be easier for your whole family to stick with over time.
1. Make Sure They Know Why They’re Getting Allowance
Let your kids know whether you expect them to save a certain amount and give a certain amount and whether they’re required to use their allowance to cover certain expenses. “Giving a young a child an allowance is not enough,” Hunt said. “It must come with the understanding for how that money is to be managed according to the family’s or parents’ values.”
2. Make It Consistent
Your kids should know how much they’re getting paid and how often. A weekly allowance is ideal for children ages 4 to 9, Hunt said. By the time kids are 10, consider paying them a monthly allowance if it isn’t tied to the completion of chores. “This forces them to plan ahead, think ahead, anticipate and delay gratification,” she said.
If you pay per chore, consider paying as soon as it is completed so you don’t have to keep a running tally and don’t risk forgetting to give your kids the money they earned.
3. Pay It in Cash
Avoid credits or a debit card-like system that will complicate the process. “There’s nothing like real dollar bills and coins to teach money principles,” Hunt said.
4. Don’t Loan Money or Give Advances
For an allowance to be an effective teaching tool, kids need to be able to make decisions about how to spend it — within the parameters you give them — then suffer the consequences of making bad decisions.
So if your child is required to use his allowance to pay for movie tickets, for example, but he can’t join his friends at the theater because he’s already spent his money on other things, don’t let him borrow against his next allowance, Hunt said. He won’t learn how to budget and will start relying on you for easy “credit.”
These methods enable you to have valuable conversations about money with your kids at every stage of their development. Starting the dialogue early on in life can make future financial issues — such as college, bills, debt, and retirement — easier to discuss.