I recently responded to a post on my local mothers’ club blog on the topic of allowance and decided others might have similar questions. The original post was from a mom of a 7-year old who wanted to start an allowance, but was uncertain of the parameters to put on it.
If you think about it, there are many issues to consider.
- When should I start an allowance?
- How much should I give my child?
- Should it be tied to chores?
- What items should my child be expected to pay for with it?
- How should it be divided among various buckets?
I’ll tackle each one of these questions in turn.
- At what age should I start? The experts differ on the answer to this question, but the basic approach should be when your child starts showing an interest in money and the things it can buy. Some books say as early as age 3, but I found when they enter Kindergarten to be a natural time when they become more aware of their world and how it works. It’s never too late, so even if your child is older, consider starting one.
- How much should I give them? There is no right or wrong answer to this question. Some of it depends on your family’s resources, cultural norms and what you expect them to pay for with the allowance. For simplicity, I follow the approach advocated by one book, which is to give them $1 per year of age per week. So my 5-year old gets $5 per week and my 7-year old gets $7.
- Should it be tied to chores? This one really depends on your family’s values and what you are trying to teach them. If your main focus is to teach them they must earn their money, then tying it to chores can make sense. My own approach is that I want the allowance to teach them how to manage money, so I don’t tie it to chores. They are expected to do certain chores as members of our household (e.g., make their beds, take their dishes off the table, feed the cat), but if they want to earn extra money, they can do certain jobs that I might otherwise have to hire someone to do (e.g., pick up the apples that fall from our tree). The risk with tying chores to allowance is that the child can always refuse to do their chores if they don’t care about the allowance.
- What items should they be expected to pay for with it? This also varies by family and by the age of the child. My young children are only expected to cover any toys they might want between birthdays and Christmas and any candy or treats they crave. My son also buys iPad apps with his allowance. As they get older, I expect to include lunch money, movies and clothes, but then the allowance will need to increase to allow room for these items.
- How do you allocate it to various buckets? While some families may view the allowance as pure spending money, many families are trying to teach their children the importance of saving and giving to charity. As such, they might divide the weekly allowance into spending money, long-term savings and charity. My son also has an account called Medium-term Savings where he puts money he is saving for a large purchase so that it can earn a bit of interest until he spends it. If you can get your child into the habit of allocating a portion of their money to savings and charity, this will serve them well as adults. There are no correct proportions to use either, but try to make it somewhat realistic with what you might want them to do as an adult. For example, putting 50% of their allowance into savings might not be that realistic considering most adults only need save 10-15% of their income to be on track for retirement. I also try to use proportions that create easy amounts for dividing. For example, my daughter’s $5 allowance is split as follows: $3.50 spending money, $1.00 savings, $0.50 charity.
An allowance is a critical component for teaching your child to be financially responsible. It’s never too late to get started and you can always adjust the parameters after you see what works best for your family. As with much in life, there is no right or wrong answer, the important thing is to just get started. If you wish to read more on the topic of how to teach kids about money, I recommend Raising Financially Fit Kids by Joline Godfrey.