Everyone has a different take on what we should teach our kids about money. You can lecture, you can lead by example, but nothing works as good as an allowance for kids. Hands-on experience with money is worth many times mere words or a handout.
It all goes together. Just giving your kids money will not teach good money skills. You need to communicate how money works. You save for larger ticket items. And if you spend all you have, even the small expenses become large.
Another big issue with an allowance for kids is how much. Of course, every child is different. Where you live partly determines the amount of the allowance. Age also plays a role.
There are three main issues when thinking about an allowance for kids:
- Earning the allowance.
- How much of an allowance.
- Teaching money skills.
Because there are so many details when thinking about an allowance for kids, we will use the question and answer format to deal with the most common issues.
What is the Right Amount of an Allowance for Kids?
When our children are very young the amount of the allowance is small. The lesson to teach early on is that people will trade something for money. The store clerk will let you take a candy bar with you for some coins or a paper bill, including the concept of change.
You can also explain saving to your kids. A piggy bank is a nice way to show how periodic income adds up. Even a small allowance, if not spent, can grow into a larger amount.
Later you can open a bank savings account with your child. I suggest your child go to the bank with you when you open the account. It is also a good idea to show your child her account when interest is credited.
The lesson is simple. Money saved grows.
Another lesson is spending all you have limits you to small purchases only.
As your child grows older it is time to bring another hard truth into the equation. Money rarely gets “just handed out”. Yes, we can complain government does this at times, but it is a terrible lesson to hand out money without earning it. Doing so teaches entitlement. By the time they hit their teenage years they will be looking for a new car without earning it. There is a better way.
First, it should be noted that allowances cause heightened emotions. There are some that strongly feel an allowance should not be tied to chores. My 42 years as a tax accountant has taught me this is a bad philosophy. “Giving” an allowance to kids without earning it does not teach the reality of how money works. Unless the child is very young, there should be an understanding that work and investing bring in money and spent money is gone forever. That you gave up some of your work for that purchase.
If we tie an allowance for kids to chores or other tasks completed, we need to acknowledge age and experience also determine the level of the allowance.
Steve and Annette Economides (yes, that is their real name), have a different idea about allowances. In their Book, America’s Cheapest Family, they explained how they handled allowances with their kids.
It worked like this. Once the kids were old enough to handle some chores they were paid based on a point system A certain job might be worth 5 points, some only a single point, others 10 or more points.
As each child aged the points did not change, the value of each point did. For example, up to age 10 each point might be worth $1. From age 10 to 12 points would be worth $2. Age 12 to 15, $5. From the15th to 18th birthday, $10.
The above numbers are a mere example. High-cost areas might have a higher allowance amount. Also, mom and dad need to afford the allowance. It all adds up.
In all cases, responsibilities should grow as the child gets older. More points and more complex tasks are part of growing up.
An allowance for kids needs to be large enough to motivate! Nobody enjoys being forced into a minimum wage job. Distasteful tasks need to be spread around. One child should not get all the “dirty work.” Work needs to be challenging and productive. Busy work gets old real fast and quickly saps motivation.
The reason an allowance needs to grow with age is because the child will start to desire larger items they wish to purchase. Yes, they might want a car as they reach toward the age of majority, but a younger child may want a scooter, and a still younger child a slingshot.
As the child gets older the tasks also need to grow. The allowance should follow the work involved to complete the task.
Then, when your child enters the real world to earn a wage, she will better understand how the process works. The employer pays you for handling tasks. Realistic expectations are the first step in learning about money.
It must also be noted that the tasks completed must be completed properly.
Finally, home chores will never pay what the free market does. Why? Because the pay-for-work allowance has a flaw. It teaches you should get paid for doing the dishes and cleaning up after yourself. But if you give an allowance with no strings attached, just for being there, it becomes like a universal basic income (UBI) scheme. Some studies suggest UBI can work, but we can see how handouts during COVID worked wonderfully in creating a solid work ethic.
Should You Ever Give an Allowance Advance?
My kneejerk reaction is to say no. And in 99% of cases this is the right answer.
However, there are times when a child wants something, but can’t afford it because they are too young to have saved enough. Similar to an adult getting a mortgage when buying a home. Sometimes debt is necessary.
As an example, say you child wants to play an instrument or play a sport. This is a good expense for your child to pay for as it is a perfect way to teach the value of money. Helping your child in these situations is sometimes a good idea. You might even want to split the cost. The goal is to teach your child that many things come at a cost. If they later quit they feel the sting of the money spent.
If you decide to “loan” money to your child, charge interest. It sounds cruel, but the real world will have no problem charging your child interest when they are an adult.
Are Kids Supposed to Get an Allowance?
There is no law or rule that says kids should get, or even deserve, an allowance.
Keep in mind the allowance is a tool. In the early years the allowance will not be attached to chores. Kids want to help so let them help. Give them an allowance so they can experience the process of saving and spending.
The balance is between teaching that home chores are not something you normally get paid for and entitlement. For this reason it is my opinion that kids should never receive any kind of compensation for cleaning their room or their mess anywhere in the house they were part of. But it is your house (their home, your house). There are tasks that need attention and that is where the allowance under the system outlined above works.
The author grew up on a dairy farm in NE Wisconsin. An allowance not connected to work performed would have killed motivation. Nobody wants to milk cows for hours every day without compensation. The traditional home is no different, with the exception that there are far fewer tasks to complete than on a dairy farm.
How Does an Allowance Teach Financial Responsibility?
We learn by doing. All the education in the world will not make up for a lack of experience. You can tell someone what it feels like when money is spent or lost, but living it brings the education to life.
Until you hold the money in your hand you have no idea what it means to earn money. You have no concept of money until you have to think the process through when planning a purchase.
Money is about tradeoffs. Learning how to decide what provides the most utility is of great value.
And, if you are lucky, you might even teach your child to avoid debt as much as possible. To understand that there is a point where you have enough. More is not better.
Teaching financial responsibility is more than understanding you trade time for money, and money for goods and services. Saving and investing eventually need to enter the mix or your child will be enslaved by money. Teach your child solid financial skills and they use money as a tool that serves them.
Why Some Parents Give Their Children an Allowance to Teach Them Financial Responsibility?
Have you ever seen a kid from a rich family where the parents give the kid a no strings attached allowance? How does that work out?
Does the rich kid act entitled? Spend without restraint because they think the well is eternal?
An allowance is more than giving your child money! Just giving money to your child sends a very bad message that is easy to see when we see the “rich kid” with a large allowance. The same can happen on a smaller scale when less rich families use the same allowance structure.
Most people are broke. They are broke because their parents did not understand money and the kids picked up the bad financial behaviors. They allow impulse to drive their money skills. Schools are not a solution, either. For a school to teach financial responsibility, it assumes the teacher has those skills. Remember, these skills are hard to teach by lecture. Example and experience count. Parents are in the prime position to teach these important skills.
What Are the Benefits of Giving Children an Allowance?
Learning financial responsibility young makes life a lot easier. Teaching your kid money does not grow on tress is important.
Entitlement is everywhere in our society. We have a society where porch pirates are a serious problem. What money skills do you think those people were taught by their parents? That you work, save and invest to have money? That there is a point where you have enough, where you are satisfied? Probably not.
We live in a world filled with entitled people. Everyone suffers as a result, including the shoplifter and porch pirate. There is no future in that kind of life. It is all take and consume. There is no end.
An allowance for kids from an early age builds a healthy mental mindset where money is involved. It isn’t free. You can’t have everything. Goals help you decide what is most important.
You don’t want a child that thinks she can have everything. Everything will not make her happy. Happiness is built on a framework where you prioritize things. An allowance helps children learn what is most important to them.
Why is it Important to Teach Kids Financial Literacy?
Nobody will teach your kids as well as you do. School will teach facts: reading, writing, math, history, and so forth. Those are all good things to learn.
But the most important things in life are not rote facts to learn. Value is a lesson best learned with people who care.
If you don’t teach your kids the important stuff like financial literacy, nobody will. And that is a hard life to live.
When Should You Kick Your Kids Out of the House?
This question always come up when the allowance discussion gets long. Do I kick my kid out at 18? Is there a good time to kick them out? When exactly is the best time to encourage your kid to move out into the real world? When does the allowance stop?
Of course, the answer is: it depends.
Personally, I think the allowance should end on the child’s 18th birthday. There are responsibilities for living anywhere, including at home with parents. The exception to this rule is if the adult child will work in a family business. The author would have been a bit irritated if milking cows paid zero the day he turned 18.
The real question being asked is: Should I turn the allowance around and start charging rent?
Well, it depends on facts and circumstances. Good children are a pleasure to have at home. There is nothing wrong with having adult children living under a parent’s roof. It’s a personal decision. If your child contributes to the family, the amount of rent you charge may be small or just include paying for groceries, or some such recurring expense. If you teach your children well they usually are a joy to have at home.
Most of all, cherish every moment with your child. It doesn’t last forever.
Everette Mills
Friday 20th of December 2024
One nuance, on when allowance goes away, related to the 18th birthday is that some kids are still students in high school at that time. As with everything on this topic it is up to the parents and individual circumstances, but graduating from high school and/or 18th birthday may be a reasonable guideline in the US.
I would also saw it shouldn't be a surprise when it goes away.