The material presented here is for educational purposes only, and is not intended to be used as financial, investment, or legal advice.
Which Allowance System Will Work for Your Family?
No matter what type of allowance for kids system you set up, you’re teaching your child about the true value of money and its purpose. Children will start to develop decision-making skills and discover how decisions can lead to favorable outcomes or ramifications.
Earning cash for chores has been a traditional tactic for teaching children financial responsibility since 1912 — Fun Wiki fact: Sidonie Matsner Gruenberg (parenting expert, writer and director of the Child Study Association of America) popularized the concept of giving an allowance in her book “Your Child Today and Tomorrow” over 100 years ago.1
Many parents want children to “learn to earn.” If they want something, they need to work for it, teaching the old adage that “money doesn’t grow on trees.” The concept of an allowance has been defined as a fundamental lesson in financial literacy— educating kids on budgeting, saving, spending and the value of a good work ethic. It builds their character and helps set them up for smart financial habits as they grow into adulthood.
Experts explain that the earlier you set children up for an allowance the better, starting around ages 4–5 (when they start to learn to count money). So, if you’re ready to start implementing a stipend system, here are some allowance strategies you can instate in your household.
3 Categories for Funds
Greatschools.org contributor Brad Munson calls it the “3 S’s: Spending, Saving, Sharing,”2 which introduces a younger child to decision-making: he can choose to spend his money, save it and watch it increase, or give it away to a meaningful cause, like a local charity or church. Through this simple method, he can experience the accomplishment of having saved enough money for a large purchase, as well as learn about altruism and selflessness through donating.
Some may argue that completing a chore for cash teaches that making money isn’t fun, or kids always deserve a reward for contributing to the household. Consider giving your child an allowance for career-related tasks and activities. This strategy encourages children to learn and dream about what they want to do when they grow up, while understanding that an achievement can earn them money too.
Rewarding Good Deeds
Another way to teach children that making money can be rewarding (in a way that’s not exclusively monetary) is to ask them to be a helper. For example, pay your child for helping a sibling with a school project or visiting an elderly neighbor. The goal through this exchange is that they can experience what it means to help someone and make a positive difference in their day. Use this as an opportunity to also explain how they can have a job that pays them for giving back and helping, like working for a nonprofit or being a nurse.
The Cost of Borrowing
Once your allowance system becomes routine, you can introduce the concept of interest to build on their financial literacy. Explain that “taking out a loan” or “using credit” is now an option. If she doesn’t have enough cash to buy something special, she can borrow money from the “bank” (meaning you) to cover the cost. The catch is that she has to do an extra chore or task, which symbolizes interest. She’ll have to pay the borrowed amount back, plus extra, because borrowing money isn’t free.
The Points System
This allowance system uses points as currency. The idea is to teach the importance of planning ahead for a purchase kids really want, rather than impulse spending on little things here and there. Decide what he wants to buy, how many points it’ll cost and what chores he’ll have to accomplish to earn those points total. Imagine that the goal is to collect 100 points to buy a bike. By using points instead of money, he can’t be tempted to pull out $10 on a whim for a toy during a Target errand.
Tip: You can also give him the opportunity to be proactive and earn bonus points by helping out more around the house. Using this practice, you’re teaching about negotiation and working together to determine how many points he deserves for that type of work. And if your child doesn’t follow through with the agreement, then he’ll have to pay back a certain number of points.
With these allowance for kids ideas, you can provide your child with a beginner’s lesson on money. From there you can continue to build on that financial education with lessons on paying bills, budgeting and using a debit and credit card. If you can help your kids understand how and why they should use money responsibly at an early age, you can help them avoid making major money mistakes as they grow into adulthood.