It’s true that no more than ever, we’re talking to our kids about money. A recent survey found that 82% of parents believe financial literacy starts at home (although the same amount also say kids should be taught money management in school).
Besides talking, kids need practice with money and financial decisions. What’s the best tool for that? Allowance, says John Lanza, author of The Art of Allowance. Lanza thinks of effective money lessons as a 3-engine plane: direct instruction, modeling as a parent, and kids’ experience with money.
“Teaching kids about money is an opportunity to share your values around what you think matters, whether that’s frugality, paying yourself first, or charitable giving and how much,” he says. But kids also need to make their own decisions and mistakes. Those will resonate more than a parent lecture. That’s where allowance comes in.
When giving an allowance, Beth Kobliner, author of Make Your Kid a Money Genius (Even if You’re Not), recommends what she calls the 4 Cs:
- Be clear about what it’s for.
- Be consistent about giving it.
- Use cash (more on this in a minute).
- And don’t tie it to chores.
- A bonus C: control. Give them control over their cash.
Many parents have strong opinions about not giving what they think amounts to a handout. But what’s an appropriate allowance by age> Here’s what experts say and how to figure out what works for your family.
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The Argument For Not Tying Allowance To Regular Chores
Allowance is a tool to learn about money, Lanza says. The goal is to open up positive conversations around the skills you want kids to learn.
“When you tie allowance to chores, you’re setting yourself up for using allowance in a punitive way,” he says. “There’s a bit of a cloud that starts to hang over the conversation.”
What happens if your kid skips her chores? Develops a habit of rushing just to be paid? The chore focus shifts the conversation away from financial literacy. But that doesn’t mean your kid doesn’t do chores or not learn the value of work.
“Doing unpaid chores around the house encourages your kid to develop internal motivation, which will help them down the line,” Kobliner says.
Learning about money and chores are both important, but kids are learning different things from each conversation. It’s easier to teach those lessons if you keep them separate.
It’s fine to pay for optional above-and-beyond chores. These can be things like cleaning the garage, shoveling snow, or raking leaves. Your child gets the experience of working for money and developing an entrepreneurial spirit. That’s a different skillset from pitching in with family chores.
Appropriate Allowance By Age (And When To Start)
You can start younger than you think, possibly by age 4 or 5 or when kids start school. The going rate tends to be around $1 per year of age. If that feels too generous, start with half. For instance, that’s $3 for a 6-year-old.
Most experts advocate three “jars.” A save jar, a spend jar, and a share jar. Let’s say you give $5 per week to your 5-year-old. That might divide up into $1/share, $1/save, and $3/spend (20/20/60). Another breakdown could be 10/10/80. The goal is to give kids enough spending money that they have some purchasing power and room for decisions but they also develop a regular habit of saving and giving.
The added benefit? Let the kids decide since it’s their allowance. They’re much more responsible with their own money than yours, Lanza says.
As old-school as it sounds, give cash so kids experience real bills and coins. Kobliner recommends cash allowance through high school. Lanza suggests transitioning to debit cards before kids leave home so they practice with “frictionless” payment methods. Research shows that parting with cold cash is harder than paying with a credit card and kids need to learn to manage the card temptation.
Help kids choose ways to contribute their share jar and keep it local if you can, such as your area’s animal shelter. Avoid turning the save jar into a “rainy day” jar. To little kids, it feels like you’re taking their money, Lanza says. They need to experience the success and gratification of not-too-far-away savings goals.
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Increase financial responsibility with age
When kids are very little, they’ll use allowance for incidental spending. Once kids get to middle school, Lanza recommends what he calls a “break-through allowance.” That’s a larger allowance given monthly that comes with increased responsibility, such paying their portion of their cell phone bill, meals out with friends, and clothes.
Every family operates differently, so decide what’s right for yours. If a larger allowance sounds beyond your means, remember that the goal isn’t to add a large line item to your budget, it’s to shift some of your own spending to them. Track the spending you’d like to turn over to the kids to identify an appropriate amount. Don’t make it too plush. You want them to have to make choices about incidental spending. Definitely don’t bail them out if they spend all their money early in the month or buy something they regret.
What if you feel unskilled with money?
The benefit of starting allowance when kids are young is “you’re talking about base level stuff,” Lanza says. It shows the value of coins, paying money for goods, and the difference between needs and wants. You’ll expose kids to literacy by reading to them before they can read. You can learn as you go with your kids, and as you do, your own comfort will grow.
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