How to Handle Allowance

Giving your children a regular paycheck is one of the strongest ways to teach them about money. If done correctly, it will teach responsibility, independence and how to spend money wisely. If your children do not learn these lessons at home, they will have to figure it out on their own.

When to Start Giving an Allowance

You should consider giving an allowance when your child shows a basic understanding of money. Typically this is about age five or when a child begins Kindergarten. Introduce coins to your child and explain the values. This may take several times before your child catches on. That is ok. An allowance can begin during the learning process. If you have older kids and you haven't been giving an allowance, it's not too late to begin. They'll love it at any age!

How Much Allowance

Allowance should cover the costs of things you are already buying your child such as toys, a treat at the grocery store, a new coloring book, etc. Figure out how much you are currently spending on your child for “extra” things (make a list) and this will give you a great idea of how much allowance they should have. In this way, giving an allowance does not increase your expenses. Also, think of it this way: You are currently managing your child's money for them (by buying that toy or treat). All you are doing is handing that management responsibility over to your child. The trick is not to tell them how to spend their own funds. They are in charge now. Let the lessons begin!

Also, you can determine their allowance by their age ($1 per year for example) per week and consider what the going rate is. What are other kids in the neighborhood getting? The amount your kids get should be enough, but not too much where they don't have to make choices on their purchases. Your kids should get a “raise” every year until they are ready for independence.

Pay Day

Some parents give allowances every week and others do it once a month. Whatever you decide, make sure you are consistent, on-time and trustworthy with the paycheck. You wouldn't like working for someone who didn't pay you either. Because making weekly allowance tends to be more complicated (having to have exact change for allowance every week), many parents opt for the monthly allowance. Kids like this because they get more at one time and they have to learn not to spend it in the first three days – or else it'll be a dry rest of the month. It's easier for mom too. Pay Day is on the first day of every month instead of four times per month. Note: It's also a great idea to have a six-month supply of allowance cash on hand, so you can be sure to be consistent on Pay Day and not have to run around to find money.

How to Begin

Begin by giving your child their first allowance and show them the list you created. They are now in charge of buying these items for themselves. On the list you may want to include at least one “needed” item such as shampoo or toothpaste. Give them the responsibility of buying this item for themselves. This is how you can teach the concept of need vs. want.

An allowance gives you the opportunity to teach money management skills to your child. These lessons will carry with them into adulthood and they will be less likely to face financial disaster. And best yet, you can teach your kids about the positive role money can play in their lives. It's fun to go shopping (right mom?) and rewarding to give it away. And it's responsible to save. As soon as you give the first allowance, teach your child to separate the money into three categories (you may want to give them their money in a way so it can be easily divided): Saving, spending and sharing.

1. Saving

First, they must put at least 10% into savings. People who know how to manage their money always pay themselves first – saving is paying YOU first. Teach your child this principal. If you pay your child a monthly $20 allowance, at least $2 would go into their savings account (or piggy bank).

2. Spending

Second, they can use the majority of the money to spend on whatever they choose. Again, the trick is not to tell them how to spend their money. You'll have to bite your lip when they want to spend their entire amount on bubble gum. It's their decision and your child will have to learn the consequences of their purchases. Once they've spent their money, you can't give them more. They have to learn that's all they get. Feel free to talk your children through their purchase decisions to teach them how they could do better next time, but they need the freedom to make mistakes with their money. Money is a great tool to teach children how to make choices.

For small children, let them take in their penny jar to the store and have them pay for their items by themselves. This will help them make the correlation between their allowance and their purchasing power. Also, if your child is saving up for a particular item, tape a picture of the toy or video game on their piggy bank. This picture helps motivate the child to save for the item. If the item is large such as a new scooter, you can have them save for a portion of it and then subsidize the remaining amount. Make the time saving not too long for young children. They will lose interest if saving takes a long time.

3. Sharing

Third, teach your child the importance of sharing their money. This forms a sense of compassion and teaches children there is more to life than money. At least 10% of their allowance should go towards a charity of the child's choosing. The charity could be a school fund raiser, a local charity for the homeless or a formal organization that may, for example, focus on saving animals (kids love saving animals). There are countless opportunities to share. Show your child many options and let them choose how they want to help.

Don't Connect Chores with Allowance

This is an ongoing debate and some families say paying their children for chores really works for them. That is great! But most will agree it complicates the system and once something begins to be too much to manage for mom, the system crashes.

Allowance has got to be consistent, so keep it simple and manageable for the best results. Moms who tie allowance to chores have to make sure the chores are done properly before giving out the money and this turns into constant checking and bugging and checking and bugging. Second of all, some kids will simply say they don't want the cash just to get out of doing chores. That's not a fun debate either, because you can't make a child do chores if the only expectation is to get their allowance. The point of an allowance is to teach money management skills. Chores are expected as being a member of the family. Also, do not threaten to take away allowance for bad behavior and it is suggested not to pay for grades either.

Work for Hire

But there is still a way for a child to earn more money and this is how you can teach work=money. Post on your frig “Work for Hire” notices. If your teen wants to make additional cash for the upcoming dance, they can pull weeds, rake the leaves or wash the cars. List the job and the amount they can earn. You can also provide side jobs to your kids such as mowing the lawn. How much would you pay someone else to mow your lawn? Transfer that fee to your kid if he/she is willing to take on the job.

When to Stop Allowance

The point of allowance is to teach decision making skills, responsibility and independence. At some point allowance needs to come to an end and the teen needs to take money matters into their own hands. Up until now they have learned how to manage money – now it is time for them to learn to earn the money they are managing. A great way to wean a child from allowance is to turn allowance into a “clothing budget” (most teens buy clothes anyway with their allowance). When a child turns 12 to 14-years old (you be the judge), allowance stops, but they move on to a clothing budget. Teens love this idea and practically forget they are no longer getting an allowance. Instead of weekly or monthly allowances, they now get an annual or semi-annual clothing budget.

For other expenditures and for when the clothing budget has been spent, your kids have to earn their own money. Babysitting, mowing lawns, helping neighbors with yard work and part-time employment for teens of age are all ways to earn money. They can also still earn money from your “Work for Hire” postings.

Part-time work gives invaluable experience to teenagers. They learn how to ask for work, apply for a job, go through an interview process and how to be dependable. It also builds their resume to gain future employment. Those with experience will have an advantage in the workforce. And those who can manage their money will have an advantage in life.