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Teach Kids About Money Management with Allowances

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Kids who control their own money become financially savvy

Brought to you by: Beacon
Share current LOB: PersonalBanking

Giving your child an allowance can provide an excellent education in financial responsibility. When children manage a budget, they learn that money is finite, as well as how to spend it wisely and how to save. They might even start investing or contributing to charity.

An allowance also relieves parents from having to say no to constant requests, instead letting their children weigh the pros and cons of each purchase.

What’s more, childhood is a perfect time to learn from financial mistakes—after all it’s not a catastrophe if your son can’t buy a new football jersey because he overspent at the iTunes store.

“You expect and even hope the child will make some dumb mistakes with his or her allowance,” says Bret Shroyer, author of Investing in Your 401(k) Kid: From Zero to Little Financial Genius in Five Easy Steps with his wife, Tracie, a parenting coach. “Those mistakes cost a lot less when you’re 14 than they do after college, when they’re making decisions that might take years to recover from.”

There are several variables to consider when setting up an allowance for kids’:

When to begin. It’s fine to start when children are young, but not before they have a basic grasp of the value of money and how to save. The Shroyers suggest introducing these concepts as early as age 3 by giving your child some petty cash to buy a treat from time to time. Once the child starts to understand how money works, typically by age 4 or 5, you can put a small allowance in place.

How much allowance to give. The older the child, the more money needed—a dollar a week is fine for a 5-year-old, but it won’t go far for a teen. Ask around your neighborhood to see what other parents give, but don’t commit to more than your family can comfortably afford.

At the same time determine whether the allowance covers only discretionary items (candy, movies) or if your child is in charge of the basics too. For example the Shroyers’ adolescent children are responsible for many of their needs, including clothing and activities. As a result they receive the monthly equivalent of what their parents already spend on those items.

“They’ll gain plenty of experience during their teen years in handling, saving and spending decisions, and it doesn’t cost us anything extra,” Bret Shroyer says.

Whether you tie the allowance to chores. Some experts believe that linking the two teaches a child about the importance of working for compensation. Others disagree, saying doing the dishes is a normal part of being a family member. One potential compromise: Give a regular allowance while offering your children the opportunity to earn additional money for extra work or bigger chores.

Either way remember that the real value of an allowance is not the money but about teaching kids about money management.

This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.