Using an allowance to teach kids about money
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.
This article was written by 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.
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There are 40 comments to "Using an allowance to teach kids about money".
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. 🙂
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!
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 digital camera, choosing to overlook the other two components of the allowance equation. But, like you said, it is teaching them the value of money and budgeting for a particular purchase, and in time will I have no doubt that they will develop the ability to rationalize their purchases in an effort to maximize each dollar.
This is exactly the sort of early education that I alluded when I was writing Start teaching your kids early to build a strong financial foundation.
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???
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 sign our names next to each weekly date range to receive allowance for the week. I had fun purposely “forgetting” for several weeks so that I could get a larger sum all at once (and then put a lot of it into my bank account) while my older sister religiously signed each week to get her spending money.
It worked.
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, us adults have sick time and vacation for such events, and we still get paid).
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 does a better job of teaching them all fiscal responsibility: they each get $10 twice monthly, but they get no lunch money for school. It is up to them to decide how much goes into “hot lunch” vs packing their own lunch, and how much they get to spend anywhere.
I haven’t given our youngest (4) any allowance yet, as he always gives away any money he receives to his siblings and his mommy.
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?
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
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?
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 cost they scheme how much they’ll save or if they can combine funds with each other.
We are starting a chores list for them to earn extra cash–which is my son’s idea. I see signs of a young entreprenuer…
@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.
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, for instance). This is where they learn the power of negotiation that may lead to a desire for entrepreneurship.
It sounds complicated, but once you get into a rhythm, it doesn’t take much time and the kids learn that there are many ways to earn income and they don’t have to be limited to a set amount that they’re “allowed” to have.
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.
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???
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.
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” is completed when they help us in one of our business ventures. We have talked about investments since they were tiny, since we drive by our rental houses, or show to an potential renter. If they help at one of our rental houses doing work or repairs they earn $. If they help around the farm, that is one of our investments and they make some $. I have had my 5 year old help me clean my “office”, our computer room in the basement. That is where I do consulting, that is one of our business ventures, she got to make some $. They help in the garden and we sold some produce at the farmers market–they kept the $. Because we juggle several ventures, they regularly have ways to help and make money. They keep the money in a jar and save for something–they usually have a list!
Also, in addition to the spending, charity (we do tithe), and saving, we also want to implement a 4th jar for investing. I read that in a magazine years before kids and I thought it was a great idea because I had never conconciously differenciated that in my own life before, and it should be.
We are building up their ING accounts now, and want to tie them in with sharebuilders to start buying some blue chips. Little steps.
By jr hi or HS, I want to be paying them a regular salary for helping with the businesses (which I then get to write off, and they can then begin to contribute to IRAs, as discussed), and they have to budget entertainment, lunch money, gas, insurance, etc. I remember a friend of ours in HS having to do that and thinking her parents were SOOO mean! But now I think it is really cool–and she now has her own accounting firm!
I think this is a great system. One question I had was what expenses are the kids expected with their spending money?
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.
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…
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.
@ 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 they feel. But, I want my children, and myself to give regardless if it makes me feel warm and fuzzy. We give because there are always others less fortunate, and they need help whether you feel like it or not.
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.
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. If they need extra, they work for it; the teenagers often babysit for neighbours. The 14yr old got rabbits last year and is financially responsible for their upkeep. This has taught her a valuable lesson about how hard it can be to save when you have dependents. I also have a baseline in my budget on hair products, clothes etc. If they want something above the basic, then they have to meet the extra cost themselves. They must also buy birthday gifts for others out of their own money. It’s certainly stopped me feeling like a personal ATM every day!
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/
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!
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 represented the work I’d done for the previous 4 or so months). Looking back, I feel this really made clear that my academics were very important to my parents, and helped me understand corporate employment better than I might have otherwise.
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 supply of money. When he’s a little bit older, if he wants more money he’ll have to do jobs to earn it and then he’ll learn the value of working for what he wants.
It’s not like a 3 year old will be able to do many jobs around the house worth paying for anyways.
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 gift-giving time arrived (birthday or holiday time), that request could be taken into consideration. Oh, and I got 1-2 gifts per ‘gift season’ — not a whole pile.
Anything else I wanted, I had to pay from my saved allowance or from my bank account which was started from savings bonds from my grandmother – for birthdays, of course. I also started working at 16 during the summers, and then by 18 I was working on weekends when going to college.
This instilled in me a sense of responsibility with money and wanting things – or not wanting things, as the case may be. I had to shop for things I wanted and I had to be careful with my money – plus, I had to partake in the chores as a requirement of being part of the family. I thought this was a smart way to be raised about money.
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 given an amount equivalent to the daily hot lunch served in the cafeteria (one we got our driver’s license, we were given a $5 gas allowance as well). We had the choice to make our own lunches (food was provided, we just had to put it together) and save that money, or we could buy our own lunch.
I started working as a “mother’s helper” when I was about 10, watching a family friend’s kids while their mom cleaned and did at-home work, and that quickly led into full-blown baby-sitting, where I began earning my own money before i could get an after-school job.
We were expected to tithe 10 percent, and encouraged to save 10-20 percent, but we were allowed to do with the rest as we wished. Also, while I was 10, I had my eye on a scooter I wanted that cost $60. I saved my whole allowance for MONTHS to buy that thing.
My daughter is five and is about to start kindergarten. I think 50 cents per year of age is a good amount for an allowance. We will require her to tithe 10 percent, save 20, and let her use the rest for whatever her little heart desires. Whatever that is will probably be pink and covered in princesses.
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.
@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 your area, he may offer some simple services in your neighborhood such as clearing weeds out of landscaping.
The two of you can negotiate the prices and details of the services. With this type of process, both of you are involved in the decision, so it will seem fair to you both.
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!
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/
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/.
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 chore all week, the amount you would owe would be greater than your allowance. In a way this was not effective, because for a little while in high school I was constantly skipping out on my chores because I generally did extracurriculars/hung out at school until the evening and had several hours of homework per night, and my brothers were still being homeschooled. I guess I felt it was unfair that they had all day to do their chores and I was busy all day and still expected to do the same. I got fined many times and felt like I was paying my parents not to do my chores, and it was worth it because I was so stressed out about school that I didn’t care about the chores anymore (I went to prep school). I had a little income stream from being paid for driving other kids to school that I used for this. Anyway eventually my parents also put me ‘on restriction’ so that I couldn’t use the phone or visit friends. That didn’t work very well either since I was at school for the vast majority of the day. My poor parents. I feel pretty stupid now about it but I guess that’s being a teenager, at least that phase only lasted a year or something.
I think despite getting allowance tied to chores, I turned out fine, me and my brothers are all ultra-frugal and save our pennies, work hard and make good salaries, did excellently in school. Plus whenever I am home these days (of course I am 27 years old now) I help my parents out with anything I can. I think I still feel guilty about not doing enough chores back when I was a kid, even though my parents’ chore system was very strict and I had more chores than any of my friends. It always used to drive me crazy that my friends would just say “I’m going to the store” to their parents, and their parents would absent mindedly hand them a $5 bill. I would be inwardly green with jealousy, as I counted the change in my pocket to see if I had enough to buy myself a soda, and whether I wanted to blow my cash on that anyway. Lessons for life!
One other element for other interested parents: my parents broke the chores into 3 areas for us 3 kids, and rotated us weekly. There were detailed job descriptions, but basically, the kitchen person had to clean the kitchen and do the dishes every night, my least favorite chore category. The laundry person had to do the laundry and fold it for the week. The outdoor person had to mow the lawn and take out the trash. I thought this was a pretty good system and would definitely consider adopting it for my kids.
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!
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!)
check out http://www.teachkidsaboutmoney.org – book was a useful read and my kids like the songs….
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.