Is An Allowance Right for Your Child?

As a parent, you’ve got to make some decisions before starting an allowance for your kids. Certainly there are ways of teaching money management other than the “earn-and-learn” structure. But none, I believe, is as meaningful to the child as the hands-on system of managing an allowance. Before you start handing out money, you should ask yourself a couple of questions. Are you comfortable paying kids an allowance? Do they really need that much money? And are they old enough to start to learn how to manage an allowance? And finally, what household chores should I tie the allowance to?

Here’s a good way to determine the answers. Once you’ve decided that an allowance is a useful teaching tool and your child is old enough (sometimes as young as three) to begin learning how to manage one, you should figure out a starting “salary.”

For my own two children, I started them on an allowance when they were three and six years old. I used an easy rule of thumb: their allowance amount is the same number of dollars as their age. I continued to use this rule as they’ve grown.

Many people’s reaction is that three dollars is a lot of money for a three-year-old. Let me explain what you and your youngster will be doing with this money.

There are three basic areas of money management I use. I call it my SOS system. Briefly, they are:

Savings:
Some portion of each allowance should be allotted for both long- and medium-term savings. For instance, saving for a bike (medium term goal) or for college (long term goal).

Next is Offerings:
This is a small amount of each allowance set aside for donations to charity. However small the sum, it’s a valuable way to teach personal values through money by showing the child how to share their good fortune.

The third area of my SOS system is Spending.
Depending on how you’ve set up their budget, part of the money should go to cover specific expenses. It can range from lunch money or bus fare for the younger ones to total management of a year’s clothing budget for the more savvy teenagers. At any age, there has to be some money that is the child’s discretionary fund – to spend as they wish. With some limitations, of course.

Share your own financial responsibilities with your children. Tell them how you allocate your own savings, offerings and spending. Show them all the ways money can work positively. They’ll see how it can cover immediate expenses like lunch money, how it works to build for the future like saving for college and it can be shared with others to help those truly in need.

Charitable giving has always been close to my heart. I’ve always emphasized that to my kids since they were little. It’s a lesson with great impact for a young child (or young adult) and it’s an opportunity for you to impart your personal values to your youngsters.

Charitable donations can be made in many ways. From giving change to a homeless person on the street (a powerful visual image for a child to see that there are people truly less fortunate than they are) to giving to a specific charity that you’ve picked out together.

Remember that charity can also mean giving of yourself and your time as well as giving money. For instance, some people volunteer their time to help out at a homeless shelter’s kitchen or by reading to the blind. Your youngster might want to consider recycling some of their clothes or toys that are still in good condition to a local children’s hospital.

This is good dinnertime conversation around the table. Find out your children’s interests. You might be very surprised at what you hear.

I’ve also got a very effect system to make budgeting your child’s allowance a real life experience. This one’s called the Four-Jar Budget System. I devised it when I first began working with parents and financial counselors and it’s caught on across the country. And with good reason – it really works! Routines, if they’re started early enough, stay with kids all their lives. You don’t have to explain to little kids why they have to brush their teeth, they just have to do it. Likewise, you won’t have to explain why their first (and forever) allowance money is separated into four jars. (You can use envelopes, pouches or boxes. You can even use bank accounts but seeing the actual containers is an excellent visual aid, especially at first.)

The Four-Jar System goes like this. First, an allowance is “work-for-pay.” You’ll set up a series of chores (very simple ones for the youngest, more responsible duties for the older kids.) Next, the allowance is paid once a week at a specific time (ritual is important.) Make sure that you have the money on hand in small denominations. Then the money is divided among the four labeled jars. The first jar is labeled Charity and ten percent of the allowance goes in there. The second is Quick Cash; to be spent any way the child wants (subject to family rules.) Jar number three is labeled Medium-term Savings, which means anything that costs more than one-weeks worth of Quick Cash. The final jar is labeled Long-term Savings. For most kids, this means saving for college. Distribute the remaining ninety percent of the allowance among the remaining three jars. The visual impact of the distribution process and the accumulation of money in each jar over time are a strong reinforcement to this simple life skill of learning to budget.

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