You know an allowance can teach kids valuable money management skills, but how to get started? This guide can help.
You’ve taught your kids to ride a bike, to tie their shoes, and even a few cooking skills.
But have you introduced them to one of the most important life skills of all: how to manage money?
Unlike just about any other skill we teach our kids, knowing how to manage money could literally make or break our children’s adulthood.
I’ve met financially-insecure people who make six-figure salaries and people with modest incomes who are debt-free and have a healthy nest egg.
The difference is these people’s ability to set a budget, avoid debt, save for a future goal, and other money basics.
Fortunately, there’s a simple tool that can give our kids the hands-on learning experience they need to start to become financially-savvy: an allowance.
How to set up a kids allowance – the RIGHT way
Experts agree that giving kids an allowance can teach them a number of skills that will serve them well in adulthood — but only if the allowance is set up correctly with the right expectations and parameters.
Here’s how to get started:
Once kids know how to add and subtract, you can give them an allowance
Money lessons can start as early as kindergarten or first grade – whenever your child learns how to add and subtract. Once children can do this basic math, they’ll have a better sense of how much money they’re actually spending or saving.
Decide which expenses your child will now be responsible for
One of the keys to making an allowance a tool for learning instead of just a handout is giving your child expenses they’re now responsible for.
For little kids it doesn’t have to be much – toys, art and craft supplies, Legos, books, anything that isn’t an essential purchase can be handed over to your child to manage.
As kids get older, they can take on more essential expenses such as clothing, data plans, or gas for the car.
Decide how much your child will receive and when
Once you’ve determined which expenses your child will now manage, you can determine how much money makes sense for them to receive.
For younger kids, the amount is a little arbitrary since their purchases aren’t essential. A good rule of thumb most parents use is to give half of the child’s age in dollars once a week.
Older kids will need to have enough to reasonably cover the costs they’re now responsible for, while also having just enough for discretionary purchases like going to a movie or concert with friends.
The idea is to give them enough that saving isn’t too difficult, but not so much that it’s easy for them to get everything they want.
Write out a contract with your kids
You’ve heard of the contract parents create with their kids to set expectations for screen use. It can be helpful to also have a contract for allowance so parents and kids stay on the same page. This document can be referenced when any misunderstanding comes up regarding who is responsible for which expenses.
Start off with physical money
Most transactions are digital today, but the problem with kids only using digital money is that it’s too abstract.
In math, research shows that kids learn numbers best if they can begin with concrete examples such as counting blocks. The same is true with money: kids will better understand money if they’re first exposed to physical currency and then move to abstract digital currency.
This means that as kids are getting started with allowance, it’s a good idea to give it to them in bills and coins. Being able to experience money as concrete and not just abstract also makes it clear to children that it is finite and has limits – a good frame of mind when making spending decisions.
Separate money into “spend,” “save” and “give” jars
Giving kids an allowance is also a chance to teach them values. For example, assuming you agree that saving is important, as well as donating money, you can create separate jars for allowance to be spent, saved, and given away, to help kids visualize making these allocations.
Then, each time you give your child their allowance, have them place your agreed-upon amount in each jar. For example, 10% in the Give jar, 20% in the Save jar, and the rest in the Spend jar.
Don’t connect allowance with chores or good behavior
Allowance is a tool for kids to learn money management. If it’s tied to doing chores or good behavior, it can diminish the money management learning experience for kids.
For more on why it’s not a good idea to tie allowance to chores see: How to Motivate Kids to Do Chores – Without Paying Them
If kids want more money, let them earn it
While most experts discourage paying kids for routine household chores (see above), it’s a good idea to let kids earn money, especially if they want more than they’re being given as an allowance.
For young kids, parents can have them do jobs for hire, or rather, jobs that are age-appropriate and something that the parent might otherwise have hired an outside company or contractor to do. Older kids and teens can try to find employment outside of the home such as babysitting, mowing lawns or lifeguarding.
Wait and see what happens next
The full money management learning experience is not going to be realized tomorrow, or even possibly a year from now.
Your child is going to make a lot of mistakes along the way to learning money management.
But these mistakes are all good – they teach kids important lessons that they otherwise would learn later in life when a blown budget is difficult to recover from.
There will be times when you cringe as your daughter spends all her savings on a talking bear that you know she’ll be bored with in a week.
At other times, you’ll have to hold firm to your agreement that your teen is responsible for paying for her data plan – even if she exceeded her limit.
But eventually, you’ll begin to see your kids make wise spending choices, become aware of what’s a good price and what’s too expensive, and hold off on impulse buys in favor of placing that money in savings.
And better yet, see them head off to college or post-high school employment equipped with valuable skills that will pay off (pun intended) for years to come.