Allowance is one of the most debated topics when it comes to teaching children financial literacy. A huge part of the controversy is whether the allowance is challenging enough—that is, whether it teaches entitlement. If you don’t plan on connecting allowance to chores (read more about the allowance/chores connection), it might be a good idea to implement a few strategies to keep your kids from seeing allowance as easy or free money.
- Require a budget. A major problem with allowance is that the majority of kids don’t have any idea what to do with the money they get—that is, they lack financial direction. Subsequently, most kids blow almost everything their parents give to them, failing to save and spending high. To prevent this problem, make an allowance budget a requirement. Even if your child devises a plan where 30 percent is video games, 20 percent is candy, 30 percent is toys and 10 percent goes to both charity and savings, it’s fine. The idea is to just get him used to allocating funds to particular categories and make him aware of how much money goes where. Make him keep his receipts and use a ledger or spreadsheet to track what is happening with the allowance money, and at the end of the week or month, sit down with him to see what went well or poorly with the budget.
- Try an allowance range rather than a fixed rate. Most parents give their child the same amount for allowance every time. This isn’t entirely bad, because it’s a lot like getting a paycheck as a salaried employee. It can help your child simplify his budget because income will not fluctuate. In the real world, however, income isn’t always this stable. Hourly employees can work overtime, for example, and people can get gifts and tax refunds one year and not the next. Your child needs to be prepared for this.
Set a low allowance amount you’ll give your child. He can count on never getting less than this from you, so he can use this amount as a base income expectation when budgeting. Then figure out a high amount to give. Each time you give the allowance, make sure it is between the low and high boundaries. When your child gets money above the minimum, he’ll need to determine how to handle it (spend, save, donate, etc.).
- Require something formal for any raise. Kids quickly learn that money makes the world go ‘round and is therefore super awesome. It’s only a matter of time before your kids make the plea for an allowance that is higher. Don’t immediately cave to this, no matter how persistent the asking is. Your child already isn’t really working for his allowance, so if he wants more, he had better be able to justify why he deserves it. Have him present a formal case to you. Ideally you can have this be done in writing, but just sitting down together and letting him give you his points verbally is okay, too, especially if your kids are really little. This is a good way to introduce the idea of the business or loan proposal. It communicates that the value you give for the allowance is not arbitrary—it is based on specific factors like your current income and your child’s age. If you deny your child’s “proposal,” be clear as to why, just like any lender would.