Tips for Turning Allowance into a Teaching Opportunity

Learn how to teach your kids about money management at a young age

From the moment your child is born, it becomes your job to help them grow into a mature, well-rounded adult. This is quite a daunting task, no doubt—especially since, as parents, we want the best for our children. For this reason, parents encourage their kids to do well in school, get involved in extracurricular activities like sports and social clubs, and to be kind to their friends and siblings.

Another critical lesson parents ought to teach their children is financial literacy, or how to manage their money responsibly. One strategy for tackling this challenge is to introduce an allowance – however, experts frequently disagree on the best approach. Some financial gurus are adamant that parents should link allowances to household chores or good grades (the “Earn What You Get” approach), while others argue that children should be taught to perform these tasks well because it is expected of them, not because they are paid (the “No Strings Attached” approached). Each approach has pros and cons.

Of course, ultimately it is up to you, the parent, to decide whether giving your child or children an allowance is the best course of action, and if so, which approach you think will be most constructive to teaching them how to better manage their finances.

If starting an allowance for your kids is the route you decide to take, here are some helpful tips on making the most out of the opportunity and how to turn common moments into key lessons in financial responsibility.

Start Young

When it comes to instilling responsible money management into your kids, “the sooner the better” tends to be a good rule to follow. Working on your child’s financial awareness during their most formative years is important for getting them in the habit of saving from an early age, before they become a teenager and are less apt to listen to your advice. Specifically, kindergarten or first grade can be a great time to start an allowance to go along with the beginning of your child’s formal education. Plus, they may have access to a school store where they can buy pencils and other school supplies.

Even the basics of investing can be learned fairly early on. Precious metal coins often hold appeal to young kids because of their child-friendly designs, providing the perfect opportunity to teach them about inflation and commodities. Later on, high schoolers should be taught about other financial markets and investing with real money.

Determine the Right Amount

Once you’ve decided to give your child an allowance, the next step is figuring out how much. You want to make sure they have enough money to practice handling it, yet not so much that they are learning more about spending than saving.

Of course, there’s no single dollar amount that is appropriate for all kids of all ages. However, here are four main factors you should keep in mind when determining the right allowance amount:

    • Age. Typically, the dollar amount of allowance increases with age – the older your child, the bigger the allowance. Some parents increase by $1/week each year.

    • Family income. Only you can determine how much your family can afford to set aside for allowances.

    • Where you live. It’s not a bad idea to take your neighborhood into account when calculating your child’s allowance, because what your kid’s best friend is getting in allowance may certainly be a factor.

  • What allowance is supposed to cover. If your child is expected to pay for clothes and school supplies with his/her allowance, then perhaps a greater amount may be appropriate. Inversely, if allowance is separate from spending money, reducing the amount might make sense.

Stay Open to Negotiation

Instead of dreading when your child comes to you asking for a raise in their allowance, recognize it as a prime opportunity to talk about finances and practice the important skill of negotiation. Ask questions such as: How long since the last raise? What new expenditures or costs warrant a raise? What percentage of the raise will be saved? (For example, maybe you decide to grant a raise as long as they agree to put 20% into savings.)

Remember, the real value of allowance is as a long-term teaching tool, so use this opportunity to do exactly that.

Be a Good Role Model

Lastly, it is important to set a good example for kids on money matters by managing your own finances responsibly. Children look to their parents for how to do everything, including how they handle money. Paul Golden, a spokesperson for the National Endowment for Financial Education, a nonprofit foundation dedicated to improving the financial well-being of Americans, says: “Teaching children good money sense must start in the home. Parents should invest time talking with their children about money and how to use it appropriately.”

For more ideas on how to help your kids become money smart, check out this handy infographic.