Teach Your Child Financial Skills with an Allowance

It is critically important for children to learn about finances from an early age. As parents, there are many ways you can facilitate those essential life lessons. Utilizing an allowance is one of them…

Establish guidelines for earning it

A key decision is whether you will link your child’s allowance to household chores or other tasks, which can help kids understand the relationship between money and work.

Some parents feel everyday chores, such as making the bed or washing the dishes, are part of a child’s responsibilities as a family member and shouldn’t come with a financial reward. Alternatively, you could pay your child for performing tasks that go beyond daily expectations.

Kate Hamilton, entrepreneur and author of The Imperfect Parent, suggests starting at the age of 5, your children could take on extra weekly tasks, such as raking leaves in the yard. To help kids learn about how they would be compensated in the workplace, she says that you could offer them a fixed rate for performing tasks — say, $10 an hour for two hours of doing laundry and washing your car…

Decide on rules for spending and saving

You’ll also need to determine whether you’ll set parameters around how your kids can use their allowance.

By working with them to devise a breakdown of how they’ll allocate their money, you can impart valuable lessons on setting a budget and sticking to it. And if they save a portion of their allowance, they’ll learn firsthand the satisfaction that comes with setting a goal for a future purchase and reaching it.

Hamilton suggests having your kids divide their allowance into money to spend, money to save and money to share. They could, for example, spend 60% as they see fit, stash away 30% in a savings account, and share 10% by donating it to a charitable cause or to their house of worship.

Otherwise, you could give your kids free rein, which can help them learn about the consequences of their financial decisions while the stakes are low. If they use all their weekly allowance on video games, for example, they may have nothing left to spend during an outing with friends…

Choose a payment method

Along with setting ground rules on how your children may earn or spend their allowance, you’ll also need to determine how you will pay them. Especially for kids younger than 10, Hamilton recommends providing cash because it’s tangible; they can easily see where their money goes, and they can’t overspend it.

As kids reach their teenage years, you might introduce payments via a peer-to-peer payment service, a bank account or debit card so they can learn about managing money with electronic methods…

Let it evolve

As your children grow up, you can use their allowance as an opportunity to discuss more complex financial concepts. For example, if you increase the amount they receive each year, you can explain how inflation works, demonstrating to your teenager that a dollar they receive now won’t stretch as far as it did when they were in kindergarten.

Once your child is old enough to get a part-time job after school or on the weekends, it may be time to reassess how much they will receive for an allowance — or whether they should still get an allowance at all. If your teen has a regular babysitting gig or serves food a few times a week at a restaurant, you may choose to let their income from work replace the allowance. Other families may prefer to keep paying an allowance until their kids are on their own…

Read specific examples of how actual families utilize an allowance with their children here.

Habits formed during our youth stick with us for life. You can help your child develop the knowledge and experience needed to be financially successful in adulthood.