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Giving Kids an Allowance - Instilling Financial Skills in Kids

Updated: Dec 9, 2018




Giving kids an allowance is a highly debatable trend not just about whether you should give them an allowance or not but also about how you should give an allowance - should the allowance be tied to household chores, or should it be just a free fixed amount.

Let’s first take a look about the pros and cons of giving kids an allowance in the first place


The Pros

Giving kids an allowance early on provides an opportunity for them to learn about the important life skills around money and management

A study showed that kids aged 6 to 10 years who were given an allowance made more responsible choices in money matters related to those who did not get an allowance. Here are some of the pros.


Kids learn about finances in a safe environment

Financial management is an important skill. If given an allowance at a tender age, kids can begin to learn budgeting in a safe environment at home under the guidance of parents. They will obviously make mistakes, but it’s better to make them early on when the impact of their mistakes is not that drastic. It’s better to not be able to save for a video game at this age than not to be able to save for the mortgage.


Kids can become more responsible

They’ll understand the value of money and learn to take responsibility about their expenses. They’ll understand the consequences of spending all their money on something not very useful. They’ll have control over impulse buying and learn to save.


Kids can improve their decision-making ability

If they have some money on hand, they’ll have to decide whether they want to save for something bigger or buy a toy with it now. School-aged kids can go to the extent of thinking about the longevity of an item they intend to buy. For example, your kid can dismiss her intention of buying a doll thinking she wouldn’t be able to play with it for a long time and instead plan to save for say, a musical instrument...that’s what kids would buy with a bunch of money, right?

You’ll also have the ability to teach them your frugal tips that have worked out for you.


They can practice their Math

Isn’t it so much more interesting to go out to the zoo, look at animals, observe them, and learn about them rather than reading about them in a book? The same applies to math. It’s one thing to take a paper and pencil to make calculations. But, much more practical and interesting to make their calculations around real money. They’ll know the weight of a calculation mistake in real life, and they’ll definitely get better at understanding financial consequences.

What’s more! Handling their allowance money is a great opportunity to introduce more complicated concepts like Percentages, Interest, etc.


They can learn Banking

If you open an account for them at a Bank, kids can learn simple banking transactions like depositing some money and withdrawing. An account can even encourage them to save more.


They can Learn to Earn

This is, in my opinion, the most important lesson. An allowance can be an amazing opportunity to teach a kid the value of hard work and what it means to work for a positive end result. If their allowance is tied to chores, they’ll understand that money is related to work. Who knows, they might even respect you more for the work you do.


The Cons

Like everything in life, giving an allowance may also cause a negative impact in some cases. Here are some possible cons:


Kids may feel entitled to money

Have you ever met “the bosses son” and known from the moment you met him that he has had everything handed to him his whole life? Don’t be that dad.

When kids regularly get an allowance, and do not link it to their contribution to the family, there is a chance that kids develop a sense of entitlement towards money. This may lead to impractical expectations for every little chore and disappointments.

You can use a few strategies to help them get over this. For example, fix some chores which they must do for “free” - for being part of the family. You can make a list of such chores and another list of tasks that can be done for a payment.


You may not always be able to afford an allowance

We don’t like to think about these situations, but what happens when times get tight around the house and it has to directly affect your kid? This is especially true for big families and those with a low incomes or budgets. There may be times that are financially tough on you and it may become challenging to give a regular allowance to your child. This is why it’s best to keep it modest. Even when you could give more, you could always drop it into a college fund for later.


Kids may develop a distaste for work

When chores are linked to their allowance, some kids may find that work is not pleasurable, especially when it is for money. It’s probably best not to ask your seven year old to re-shingle the roof.


Most Common Strategies

While there is no set rule regarding the strategy that you follow for giving an allowance, there are a couple that most people use.


Give a fixed amount per week

This method involves giving the child a set amount weekly or monthly, regardless of the tasks they do during the time. This method is based on the belief that every family member needs to contribute towards tasks and can get a stipulated allowance or none at all.

The advantage of this method is that the child gets to plan how to spend the money. The disadvantage is that the child does not learn that he can earn money, he rather considers his allowance as a gift.


Give pay for chores done or grades earned

This method is based on the belief that kids should learn from a young age that you need to grind to earn - that is the way of life and it is best learnt when young.

When using this method, kids learn the importance of working hard. They also learn that they have control over how much they earn. On the downside, some kids may decide not to work even if it means not getting an allowance.

To create a balance, you can divide some chores that need to be done for free, for being part of the family and other chores that can be done for money.

For example, tidying up their room must be for free, while helping you tidy up or sweep the living room can be done for money.


What Age should they be getting their first allowance?

Again, this depends solely on you and your partner as parents. Most parents start when their child is around five or six years old. Many parents wait till their 10th birthday. And, a few others wait for longer than that.

Some indicators that your child is ready to handle some of their own money include:

Asking about the costs of items

Can perform basic arithmetic and spot patterns

He has learned about currency, can identify the different coins, and understands their value.

One way is to start on some occasion like a birthday or Christmas or when the tooth fairy gives them her first visit.

This publication outlines some great ideas to start a conversation about money matters.

What if I decide not to give an allowance?

Many parents choose this way forward. There is nothing wrong in choosing this method. This works on the philosophy that every family member needs to contribute without any expectations while the needs of everyone are met.

The big advantage of this route is that kids learn that work can be rewarded with a satisfaction that money alone doesn’t bring. The disadvantage is that they will not learn about managing money at an age when they could easily grasp the concept.

If you are in doubt, try a plan for a few months and see how it works. You can always change it if you think it is not for you.


The Bottom Line

The practice of giving kids an allowance may seem daunting. But, as mentioned above, for all the skills it equips kids with, this practice is worth a try. The age you start is flexible, though many recommend around 5 to 6 years.

So, if you feel that the benefits outweigh the cons, do think about starting it as soon as your kids are ready. Talk to your kids about what you expect them to do, the rules you want to set, and other things about your plans. Watch out for any of the cons surfacing and modify your strategy to address them. And, you’ll be right on the way of raising financially independent kids.

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