Using an allowance to teach kids about money

This is a guest post from Nickel, who writes about personal finance at Five Cent Nickel. Since that and his four kids don't keep him busy enough, he's launched another site more narrowly focused on credit card offers.

Though small was your allowance, you saved a little store; and those who save a little shall get a plenty more. — William Makepeace Thackeray

Just over three years ago, we decided to start paying our kids an allowance. While the decision whether to implement an allowance is highly personal, I thought I'd pull together some thoughts on the subject for those of you with kids of your own.

Why an Allowance?

For us, the decision whether to institute an allowance came down to one thing: a desire to teach our kids how to handle money and make good financial decisions.

Because of this, we decided to provide them with a basic allowance free and clear, as opposed to tying it to household chores. While some may disagree with our reasoning, we expect our kids to help out around the house whether or not they're getting paid for it. That's just part of being a family.

When they go above and beyond the call of duty — like the time our ten year old (he was eight or nine at the time) spent the better part of a Saturday crawling around under the house helping me improve the vapor barrier — they get paid something extra. To us, this strikes a nice balance between teaching them family responsibility and teaching them that money ultimately has to be earned.

When Should You Start?

One of the first issues you'll face is determining the right age to start an allowance. Of course, the “right” answer will vary on a case-by-case basis.

When we first started, five years old seemed perfect. Since then, however, we've come to realize that three years old is even better (for us). By that age, most kids are old enough to count, and nearly all of them are interested in buying things in a store. Since we scale our kids' allowances based on age, starting early gives our three year old a chance to get his feet wet without letting him do too much damage.

Our Allowance System

At first, we paid our kids $0.50 per week per year of age, which meant that our then seven year old received $3.50/week, and our five year old received $2.50/week. This worked well, but the weekly aspect of our allowance system was somewhat problematic.

With four kids running around the house, a full-time job, and a side business, time has a way of getting away from a person, and all too often we found that we were forgetting to pay their allowance (despite their persistent reminders) for weeks on end.

We've since moved to a monthly system wherein we pay each child $3/month per year of age. Since transitioning to monthly payments, things have really smoothed out. We typically sit down on the first weekend of the month to dole out their allowance, and the kids have also had to learn a bit more about budgeting, as they're responsible for making their money last for four weeks at a time.

In order to teach the kids not only about the value of money, but to also instill in them a sense of civic responsibility, we divide their allowance into three components:

  • Spending money (60%)
  • Long-term savings (30%)
  • Charity (10%)

The kids have free reign over the spending portion — they can blow it as they get it, or they can save up for something a bit bigger. Their long-term savings (destined for college, or something equally worthy) goes into an online bank account, and we let the charity contributions accrue throughout the year before letting the kids each pick a charity for their donations.

Our current bank choice for their long-term savings is ING Direct, as they offer a reasonable interest rate, and they make it painfully easy to create subaccounts. The kids love logging in on allowance day to check their balance, transfer their next allotment into their account, and see how much money they've earned.

Benefits of an Allowance

Basically, this system has worked well for us. Aside from teaching our kids how to handle money responsibly, a huge (and somewhat unexpected) benefit has been that they no longer ask or beg for things in stores. They know that it's up to them to save up for something if they want it, and they're astonishingly good at it.

So far, our oldest has saved up for things like a Nintendo DS and a digital camera — purchases that involved months of no spending, saving birthday money, etc. And at the end of the year, they even have a great time picking out their own charities.

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Omar@financeologyacademy
11 years ago

My wife and I give both our sons, 11 and 13 the same monthly allowance. Not sure if that is fair or not, but they do not seem to mind. At least no complaints yet. 🙂

RetiredAt47
RetiredAt47
11 years ago

This is a great way for children to start learning how to manage their own finances. When my sister and I were teenagers, my parents came up with a good plan. We got a “clothing allowance” – a certain amount per month. We didn’t get it in cash, but rather tracked it in a book. We could accumulate unused credit, and borrow forward up to one month’s worth. I think it may have helped fuel my love for Quicken!

Eric J. Nisall
Eric J. Nisall
11 years ago

Personally, I am completely i favor of instituting an allowance system. It not only teaches children the value of money, but also instills in them the foundation of a strong work ethic, especially if the parents require that certain tasks be met prior to payment (ie: completion of chores). That way, as they get older and their wants become more expensive they will be more open to seeking out more responsibility in order to make more money to afford those purchases. I’m sure that there will be some who will comment that children do not need a gaming system or… Read more »

MSJW
MSJW
11 years ago

Great post. I have a youngster, and my wife have often discussed how to best educate our children on financial responsibility.

The component that I haven’t heard of to date is giving 10% to charity. I think that is amazing! But have to ask, do you take the tax deduction for the charitable donations???

Joyful Abode: Domesticity by Trial and Error
Joyful Abode: Domesticity by Trial and Error
11 years ago

I agree with giving your kids an allowance to help them learn how to handle money, but it seems like you tell your kids what to do with it (the 30-60-10 thing). It may be slightly more painful to just “let them go” with it, but probably more educational… I, too, grew up in a house of 4 kids, and we each figured out our own money-management style through having freedom with our allowances. Also, my dad had some trouble remembering the weekly allowance thing too, so he made up charts for each of us, on which we had to… Read more »

Frugal Dad
Frugal Dad
11 years ago

This is an are where my opinions have changed some as my kids have gotten older. I used to be of the “chores for money” mindset where they had to complete a commission schedule and only got paid for work performed. I’m relaxing that a bit and paying a standard amount every other week (when I get paid) because the commission schedule was just too much to keep up with, and because some weeks when they were sick, or busy with school, they didn’t get to every chore, and it didn’t seem fair to penalize them for it (after all,… Read more »

Lance Lavandowska
Lance Lavandowska
11 years ago

I’ve also got 4 kids, and have tried a number of payment “schedules”. The last was 50 cents per year of age, twice monthly (that’s when I get paid); 14 yrs old = $7. I also had a hard time remembering to pay the kids, mostly because I rarely carry cash and allowance meant a special trip to the bank to get cash in the proper denominations (and making sure I had enough quarters for the kids with odd-ages [like 7 and 13]). My newest one is terribly unfair to the oldest kids, but is easier for me and also… Read more »

Ron@TheWisdomJournal
11 years ago

Since my kids are a little older, I’m considering setting up checking accounts for them and making automatic deposits from my account to theirs. This way, they learn about maintaining a balance, handling a debit card, and learning about how our banking system works. They both have pretty regular babysitting jobs where they could make the deposits for that cash as well.

I’m thinking that they could open up a Roth IRA and begin saving…at age 13.

Don’t you WISH you had done that?

Sara V
Sara V
11 years ago

I don’t have any kids, but lately I’ve seen several articles relating to nipping the debt problem in the bud by educating kids. This is an article in my Kiplingers mag: http://www.kiplinger.com/magazine/archives/2008/08/children-money-lessons-by-age-group.html

BPT - MoneyChangesThings
BPT - MoneyChangesThings
11 years ago

You gotta check out http://www.msgen.com/assembled/money_savvy_pig.html
The four compartment piggy bank. It’s a little silly to pay money for it, but take the idea and run with it!
I have heard some families of older kids zip money around via paypal. We always had a running total for each kid on the bulletin board, and then they would ask me if I’d remembered to add this and that. With paypal you have an electronic record of each transaction. ANyone doing that?

Leigh
Leigh
11 years ago

We give our two an allowance and divide it slightly differently. 50% for spending, 25% for savings and 25% for charity. They choose their charity and have pooled their money to make a bigger impact. They both have savings accounts at the Young Americans Bank here in Denver(customers have to be under 21). We also pay monthly because weekly is too hard. The lessons are sinking in, they watch for sales, make choices based on their resources and are starting to ask friends (who don’t always know)how much such and such a toy or game costs. When they know the… Read more »

Eric J. Nisall
Eric J. Nisall
11 years ago

@Ron:

The only people that are permitted to establish an IRA are those with taxable income. Until your children attain the age at which they are legally permitted to work (which varies by state), they will not be able to contribute to an IRA. Once they are legally permitted to work, and begin earning taxable income, they will be able to contribute either $5,000 or the amount of their gross taxable income in any given year.

Refer to IRS Publication 590 page 8 for the guidelines for who is permitted to contribute.

Tracy at Parenting Cents
Tracy at Parenting Cents
11 years ago

I like the idea of a hybrid system for kids once they get into school – basically a “base salary” plus commission. The base salary is there to buy essentials like school lunch and clothes, with the amount based on your budget for such items. The commission is earned through work beyond normal household obligations (not just cleaning their room). A kid can be solely responsible for collecting the trash every day, taking care of a pet, or other recurring duty. Even more money may be earned through additional one-off jobs (my daughter likes cleaning the wheels on my truck,… Read more »

Eric J. Nisall
Eric J. Nisall
11 years ago

Sorry, page 8 of Pub 590 refers to Traditional IRA’s. Page 60 is the qualifications for Roths, however the premise is still the same–an individual must have taxable income in order to contribute to either.

Prakash
Prakash
11 years ago

I like the ING sub-accounts for tracking kids’ gifts and spending accounts.
1. Do the kids logon themselves to view their ING account balances, or the parent logs on and shows them their balances – i.e. does ING offer creating separate logons for sub-accounts with grouping (i.e. bigkid-sav, bigkid-spend, bigkid-charity under one logon?)
2. Spending – when you’re at a store and bigkid wants to buy something, what do you do? Separate checks or check card / make a note and transfer out later (easy to foget) / other???

Jennifer
Jennifer
11 years ago

I think the question of whether or not allowances should be treated like a ‘salary’, i.e., in exchange for doing certain tasks, is an interesting one. A lot of people have concerns about setting up extrinsic incentives for kids (http://economicsforteachers.blogspot.com/2008/07/intrinsic-vs-extrinsic-incentives.html) where they see chores as something they are only doing for money. My parents always told me that my chores were part of my responsibilities as a member of the family and they weren’t tied to my allowance but, sort of like Tracy’s commission idea, we could earn extra money for doing extraordinary things once in a while.

Stumblin' Through
Stumblin' Through
11 years ago

I’m always glad to see articles like this to see how we are doing as parents–it’s a lot harder than I thought it would be! Some things we have implemented around our house (though keep in mind my kids are only 5, 3, and 6 months–I plan to adapt as they get older) Like many, we distinquish between “chores” around the house that you do because you are a part of the family, and “jobs” where they can actually make money. Extra chores don’t earn money, but can earn a piece of gum, ice cream, or similar treat. A “job”… Read more »

Sam
Sam
11 years ago

I think this is a great system. One question I had was what expenses are the kids expected with their spending money?

Sam
Sam
11 years ago

You can open an IRA for kids as long as they have earned income (dog walking, baby sitting count) http://www.fool.com/taxes/2000/taxes000512.htm

My brother does this for his kids who are 11 and 13. Also, although the kids have to earn income the income doesn’t have to go into the IRA. If Junior earns $100 dog walking he can keep that money for himself and Mom/Dad can put their $100 into the IRA for junior.

Geek
Geek
11 years ago

I agree with the poster that said the 60/30/10 thing is too controlling. What if they don’t want to give to charity? It’s up to you as a parent to make sure they want to give to charity – instill your values on those malleable little brains.

I suppose they aren’t paying taxes though…

jtimberman
jtimberman
11 years ago

Don’t make allowance for people, even your children. If you want to teach them the value of money, make them earn it, and call it a commission instead.

Dave Ramsey’s Financial Peace Junior is an inexpensive tool to get started with how to implement this idea. It is geared toward kids age 3-12. For older children he has other resources and ideas.

Stumblin' Through
Stumblin' Through
11 years ago

@ Geek–I disagree. MIGHT have agreed with you before I had children, but so suprised to learn that we are all born with this since of entitlement–I cry and I want my pants changed, fed, or someone to put me down, hold me, etc. We want the world to revolve around us. One way to “instill my values” is to show that this is the way we do things. At a minimum you will give X% to others, then they can learn that there are dividens that cannot be earned any other way, and you will be surprised how charitable… Read more »

Mark Nelson
Mark Nelson
11 years ago

You should be commended for you allowance system. All three components are extremely important.

The only thing you might want to add is a portion for investing. As the money would build in this component you could teach them about investing for college etc.

I applaud what you are doing.

Jane
Jane
11 years ago

This is exactly what I do with my 3 kids, aged 9, 14 and 16 (except they started with $3.75 pr week at age 7 and increase $1.50 pr year. They need to receive enough money to make mistakes with.) Despite the fact that we’ve lived in 3 different countries and dealt with 3 currencies, the principles have stayed the same and it has worked like a dream. The allowance is not attached to chores, which are part of the responsibility that goes with being a member of the family. Things like gardening or washing the car carry a wage.… Read more »

Jeremy Hall
Jeremy Hall
11 years ago

Great write up and explanation of your philosophy. I had an article linked here on GRS a year or so ago with my thoughts and the “family job” we obtained to help our kids learn the value of earning money. I have found this a huge asset in helping my kids learn the principles you are talking about, such as saving and wise spending.

http://www.whatsgottastay.com/teaching-my-kids-the-value-of-work-and-money/

Kristen a.k.a. The Frugal Girl
Kristen a.k.a. The Frugal Girl
11 years ago

Like you, I’ve got four kids and I just could NOT manage to keep up with the weekly thing. We’ve recently switched to monthly allowance and we find that doing it this way works so much better!

Hel
Hel
11 years ago

My parents made my allowance my ‘paycheck’ for doing my ‘job’, attending school. It’s been a number of years, so I no longer recall the ‘payscale’ calculation, but it incorporated my age and the grade I was in. I got bonuses for good grades on anything, from the smallest quiz to my report card. The amount of the bonus was proportionate to the time frame of work represented by the grade, so a pop quiz good grade was a tiny bonus (because I’d done no extra studying for it) while a semester report card was a large bonus (because it… Read more »

Richard
Richard
11 years ago

Don’t make allowance for people, even your children. If you want to teach them the value of money, make them earn it, and call it a commission instead. Step by step I think. I think Dave Ramsey, who you quoted, would agree with the principle of milk before meat. Our oldest is only 2 and doesn’t get an allowance yet. He’s not into the “I want” stage yet, but I expect that he probably will get that way next year. By giving him a small allowance for his “I wants”, I hope that he’ll learn that there is a limited… Read more »

Lauren Muney, lifestyle coach
Lauren Muney, lifestyle coach
11 years ago

I only had an allowance growing up – I wasn’t allowed to beg for whatever I wanted from stores. I did chores “for free”; that is, I had my allowance for being essentially a good kid, and part of my ‘job’ was to do the chores I was expected to do. There was no negotiation except on an individual basis (“I can’t mow the lawn tomorrow because I have a track meet, so I will do it in 2 days. is that ok?”). If I wanted a special toy, I was allowed to tell my mother so that when a… Read more »

kristen
kristen
11 years ago

I, too, growing up was given an allowance that was not tied to chores – like many people have said, basic chores were a part of being a member of the family. Our allowance was a learning tool for managing money. While I do feel it’s important for kids to learn how to earn money, I don’t feel that in order for them to have their own, they need to earn it from the get-go. We received a weekly allowance in elementary school that was a few dollars a week. One we started junior high and high school, we were… Read more »

Irina
Irina
11 years ago

I have an 8 year old boy, and would like to start giving him an allowance. What would be a good amount to start with? With toys and electronic games being very expensive these days, I want the amount to be something that we both will think is a fair number.

Tracy at Parenting Cents
Tracy at Parenting Cents
11 years ago

@Irina: I would suggest having a discussion with your son to find out what types of things he might buy if he had money to spend. Once you have a few examples, help him determine the cost of each and help him figure out how much money he would need to save to buy them in a reasonable amount of time – say, every 6 to 12 weeks. Then turn him loose to create a proposal for how he could earn that money. He may offer to do certain jobs around the house (dusting, cleaning, organizing) or, if feasible in… Read more »

The Money Answer Guy
The Money Answer Guy
11 years ago

Nickel – I think it is an excellent way to teach kids about saving, spending, and giving in an easy and totally kid-friendly way. The online banking gives the kids the lesson but also the excitement of logging on to their own account. Teaching kids early about money will hopefully make a huge diffence down the road, as they get older and they learn to grow up with savings and charitable donations. Great job!

CreditMom
CreditMom
11 years ago

I love this post. We also tie allowance to chores that are above and beyond the typical ones. We don’t believe in giving allowance because they cleaned their rooms…they are expected to clean their rooms. But, we do give allowance for pooper scooping, doing the family laundry, taking out the trash, etc. Since then our kids are responsible for their own purchases. You’re right, they don’t ask for much any more. Check out my most recent post which tracks a countdown to replace the RockBand drums they broke.
https://www.getrichslowly.org/using-an-allowance-to-teach-kids-about-money/

Linda
Linda
11 years ago

Thank you for writing about this important topic. At Tessy & Tab, we also believe 3 years is the perfect age to start teaching hands-on lessons about money. Preschool age kids feel so proud when they accomplish tasks and build their independence by taking on more responsibility. Check out Keith’s story on the Tessy & Tab fan club blog http://bluelakepublishing.typepad.com/tessyandtabfanclub/real_life_experiences/.

Alison
Alison
11 years ago

Am I the only one who DID receive an allowance tied to doing chores? I mean, my dad often gave us speeches on helping him and mom out around the house being our responsibility, which I think were effective at making us responsible and at least somewhat helpful, but he also tied our allowances to our chores once we were pre-teenagers. We got generous allowances but were expected to buy most things for ourselves. Every day we did not do our chores, we were fined a certain amount. I think he worked it out so if you didn’t do your… Read more »

Heather
Heather
11 years ago

Great discussion, and thank you for the detailed post.

Q: What about birthday money they receive? Does that get divided up into the spend/save/tithe categories, too, or is that automatically spending?

All opinions welcome!

Rachel
Rachel
11 years ago

I have to agree with a few of the people on here about the charity thing. I’m all for charity, but you have to WANT to do it.

When you don’t want to give your money away and you are forced to anyway, isn’t that just a tax then? Or communism? 😉

(I know that sounds silly – but think about it for a second!)

Jon
Jon
11 years ago

check out http://www.teachkidsaboutmoney.org – book was a useful read and my kids like the songs….

Teach Children to Save Money
Teach Children to Save Money
10 years ago

Our children must EARN their allowance, no freebies!! As a single parent that was *less* than good with money throughout my youth, teaching children about money is CRUCIAL, in my mind. I’m not going to blame parents, schools, etc, but quite simply, I clearly “didn’t get it”, and I am still paying for those mistakes a decade later! And quite frankly, I hate the position I got myself in, everytime I pay off my past debts… I could have used my time/money sooooo much better.

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