Allowances are a great way to teach your child to be financially literate, but it’s hard to know how to make it work for you, and then there’s the most common questions, how much should I pay and when should I start? Here are some tips to turn an allowance into a powerful training tool but remember, there is no “right” system for everyone, so feel free to experiment with your own approach but stick to your guns once you and your child have agreed upon a plan.
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Start when your child begins to understand the value of money, knows the difference between wants and needs and when you believe they are old enough to manage it; usually around age 6.
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Spend some time thinking about what all you want the allowance to cover; for example: charity, candy, movie tickets, hobbies, toys, electronics, music and gifts for friends. Then decide how much is appropriate based on the items you expect it to cover. This should be a “fixed” amount that is paid on the same day each week. Remember: (1) a portion of each allowance will be allocated to charity, fun money, short-term savings and long-term savings, (2) to adjust the allowance as the child matures to include allowance for clothing, transportation and other items as appropriate.
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Sit down with your child and explain what an allowance is, what it is expected to cover, how much it will be and when it will be paid. An allowance will help you both have more control over the child’s finances but it’s important to stress that the money must pay for the agreed upon items.
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Provide an easy-to-follow system that they can use to allocate their money between charity, fun money, short-term and long-term savings. Also provide a place for them to keep their savings – either open a savings account for them or use the “piggy” bank system. Be sure to keep it simple for them to follow and you to monitor.
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Encourage them to set savings goals for big-ticket items like a bicycle or headphones. Think of ways to celebrate them when they succeed, like agree to pay half or take them for ice cream.
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Let them make their own decisions with their fun money and short-term savings but remind them of the consequences (as age appropriate). You have the power to veto spending and of course any purchase that is unhealthy, unsafe or against the family values. Do not rescue them when they fail. Let them feel the disappointment or embarrassment of their decisions as this is often the best learned lesson.
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Allowance should not be used as a reward for good grades and should not be tied to chores or used as a bribe to get them to do something. Do not use allowance as a disciplinary tool. If a child misbehaves or has a bad grade, these should be dealt with in other appropriate ways.
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