Is there one right way to give your child allowance?

Published December 21, 2020|4 min read

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Giving allowance is an important way to teach your kids about personal finance. It may be your child’s first exposure to money and can shape their views on it. And like any other parenting topic, it’s under dispute.

“It’s really this controversial parenting debate,” said Andrea Woroch, family budgeting expert. “There’s a real taboo when it comes to talking about money, even with your kids.”

According to Policygenius’ annual Parents & Money survey, one in three parents give their kids an allowance. Among those parents, around 40% give more than $20 per week. What are the benefits of giving allowance? Here’s what you need to consider.

Does giving allowance actually work?

There is no one right way to give an allowance, said Cameron Huddleston, a personal finance journalist. Some of the benefits of allowance include the ability to teach your kids about money, financial responsibility and the consequences of poor decision making. An allowance can also introduce other money concepts to your child. The same Policygenius survey found 49% of parents that forgo allowance had yet to discuss major financial concepts with their child.

“It’s important for kids to have a chance to manage money on their own,” Huddleston said.

But while some parents think there’s a benefit to giving kids money at an early age, Huddleston warns against doing so without purpose.

“It can be dangerous and lead to a shift in spending,” she said. “You need to very clearly explain the concept of money and the consequences of it.”

How to give an allowance

How much and how often you give allowance depends on your financial situation and what you hope to teach your children about money. Here are two of the most common ways.

Incentive-based

This method involves giving your kids allowance in exchange for something, like finishing chores or getting good grades. Kids can learn the concept of earning money and the correlation of work and reward. Huddleston uses this method, and believes it encourages children to work hard to earn more.

“Kids need to learn that money isn’t just given to you,” she said. “Of course, there’s certain things they have to do because they are a part of this family, like taking care of the pets. But we want our kids to understand the concept of working.”

The incentive method also gives kids extra money to spend on non-essential items, like video games. This can teach other money lessons, like budgeting, savings and even investing. Huddleston gives each of her three kids jars for their allowance money: one for spending, one for saving and one for donating. She doesn’t dictate where the money goes, and over time each kid developed their own money habits.

The drawback to this method is psychological. Children may tie everything to earning money and may become less motivated to help out, said Ellie Kay, financial author and founder of Heroes at Home, a nonprofit that teaches financial literacy to military families. Altruistic tasks like setting the table may become transactional to your child.

“It’s just going to frustrate them and make them treat everything like a business deal,” Kay said.

Also, be careful when offering incentives: You don’t want to promise your child $10,000 in return for good grades and then be surprised when they come back with perfect scores.

Set allowance

The other popular allowance method involves giving your child a standard amount of money each week or month. It can help your child budget on a set amount of money, like you would a paycheck, and teach them the importance of saving.

Woroch doesn’t like this method: “It’s so easy to just give your child $20. They should feel like they are contributing in some way to receive that money.”

Some parents take a hybrid approach, giving their child a set amount of money each week with the incentive of “bonus” money for chores done or specific accomplishments. This combines the benefits of both methods, but no matter how you do allowance, it’s important to talk about it with your kids beforehand.

“Habits are created, not born,” said Kay. “It’s about creating good work habits, good life habits.”

Other factors to consider

  • Give cash. Kids may not understand that they’re spending money when they swipe a debit card. Keeping allowance in physical form will help your child realize how finite money is and how much they’re spending.

  • Make rules. Set guidelines on how allowance is given and how much they can expect to receive. This is a good time for parents with older kids to go through what they will help their child pay for (like essential expenses) and what the child will pay for.

  • Be consistent. This will help reinforce learned behavior about money, said Kay.

  • What works for one kid may not work for another. Huddleston said all three of her kids approach and handle money differently. Having open communication about money can help your child develop positive money habits on their own.

  • Make it positive. Experts agree that allowance should only be positive. Avoid taking away allowance as a punishment, which can cause financial anxiety in your child and erode trust, said Woroch.

  • Incorporate donations. Studies show that teaching your kids to give is one of the most important lessons you can teach them. Consider encouraging your child to donate a portion of their allowance to charity.

  • Practice what you preach. “How can you pass on good money habits when you don’t have them yourself?” says Kay.

Want more ideas on how to teach your kids about money? We’ve got a list of 50 here.

Image: Getty Images / Maskot

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