Should Parents Give Their Child Allowance?

Learning how to manage money is an important skill, and it’s one that is best learned earlier rather than later. Giving your child an allowance is one way to start teaching them about budgeting and saving, but it’s something that should be done with intention. Understanding the rationale behind giving a child an allowance and being purposeful with the process can help get your child’s relationship with money started in a positive direction.

Should You Give Your Child Allowance?

While many financial experts have different opinions on the particulars of giving your child an allowance, most do agree that it’s a good idea. Receiving an allowance lets your children start to understand how money works and gives them a chance to learn and practice financial strategies for the future.

Neale Godfrey, a personal finance expert and author of more than two dozen financial books and lessons for kids, says that “kids need to learn the natural consequences of money and that the only way you get money is to earn it.”

Tying an allowance to chores lets your children start to see how money is earned, and being there to coach them through the what to spend and what to save process gets them started on basic budgeting and money management.

Do Children Deserve Allowance From Their Parents?

Children don’t necessarily deservean allowance from their parents, but tying it to chores in some way lets you start teaching them about finances while avoiding a sense of entitlement. And studies have shown that using an allowance as a way to open the conversation about finances with your children can be helpful to them as teens and adults.

Dr. Lewis Mandell, a dean emeritus and professor of finance and managerial economics at State University in New York at Buffalo, notes that the 2001 National Jump$tart Survey of U.S. High School Seniors showed that children who were given money after completing chores growing up scored higher on a financial literacy exam than those who were given an allowance they didn’t have to work for.

However, Mandell notes that children who talked about money with their parents scored an average of 10% higher on the exam than those who never discussed finances with the parents. This could indicate that it’s the conversations around the allowance and not so much the allowance itself that is most important.

Should Parents Pay Kids Allowance for Chores?

Paying your children an allowance for household chores can be a way to let them start earning and dealing with money before they can go get jobs. However, it’s important to set up a system where your child understands that money can be earned but doesn’t expect to be paid for every single thing they do.

Godfrey advises parents to “set up two types of chores in your house: citizen-of-the-household chores and work-for-pay chores. Kids don’t get paid for citizen-of-the-household chores. These are just meant to teach your kids to be good citizens of the house, and hopefully later of their communities… But you are the CEO of your household, so you decide what are citizen-of-the-household chores and what are work-for-pay chores.”

So in your house, you may decide that making beds, doing laundry and cleaning up after dinner are citizen-of-the-household chores while mowing the lawn, dusting and walking the dog are work-for-pay chores.

What Age Should You Start Allowance?

You can start giving your child an allowance as soon as they are able to understand the concept of exchanging money for goods. Even children as young as 4 or 5 can do age-appropriate chores to earn an allowance and be taught to divide earned money up according to saving and spending.

How you handle allowances can differ depending on the age of the children. Young children do well with visuals and can divide money (coins often give a better visual effect) into envelopes or clear jars so they can see it start to add up. Older children may be able to open a bank account with a parent to start gaining additional experience in balancing a checkbook, tracking spending and savings goals and learning how banks and other financial institutions work.

Godfrey suggests having children divide their money as follows:

10% to charity
30% to medium-term savings (think a special toy or buying their own ice cream)
30% to long-term savings
30% to fun money

So if you have a teenager getting an allowance of $10 a week, this would break down to $4 to charity and then $12 each to medium savings, long-term savings and fun money per month. It’s also a good idea to have your children break money down like this when it comes to any non-allowance funds such as birthday checks from grandma or money from a summer job.

No matter what work your children do for allowances or how you have them track and budget their money, getting this first look at personal finance when parents are still around to talk about issues and model good money behavior is important.