The Allowance Question

Parents often wonder how to handle the time-honored tradition of providing their children with an allowance, or whether it’s a good idea at all. You’ll find a wide range of opinions among experts, but one point of agreement: Kids should receive an allowance of some sort to give them practice budgeting, spending, saving and making financial choices.

Beyond the necessity of an allowance, all bets are off. Families approach the allowance issue very differently based on their beliefs about money, income level and individual preferences, and that’s perfectly okay. Allowances don’t have to follow universal guidelines to be useful learning tools or to be fair, for that matter.

Here’s what does matter when it comes to an allowance:

Kids should get a regular chunk of money they can count on. This is their income, a kid-sized version of the basic paycheck. So is it a paycheck? That is, is the allowance tied to work performed in exchange for the money? There are solid arguments on both sides.

On the one hand, treating the allowance as earned income drives home the relationship between work and money. If kids perform their assigned duties to the agreed standard, they get paid. If they don’t, then there’s no paycheck. That basic lesson about how we exchange labor for money is one everyone ought to learn at a young age.

On the other hand, being a part of the family really isn’t the same as holding a job. Your kids are an integral part of your family; they deserve to share in its wealth and should share responsibility for keeping the household running smoothly. In this paradigm you earn the family’s money and kids do other things to help out. They get an allowance simply because they’re part of the team, same as with chores.

I advise parents to provide the allowance as a given, not tied to chores. Not that I’m opposed to chores — far from it! I just think that allowances and the responsibility to help meet family needs are issues better addressed separately.

That said, if you want to tie your child’s allowance to chores, go for it. Watch out for unintended consequences though, such as your kids deciding they’d rather forego the money and skip the chores, especially once they’re old enough to earn money by working outside the home. If you go this route, be sure you are prepared to deal with this likely event.

No matter what you decide, be consistent about providing it as promised. Kids need to know that the money will show up or their budgeting feels futile, just as it does for adults if paychecks or any other source of income fails to arrive as expected.

They must understand exactly what that money has to cover.

Does providing an allowance mean you don’t have to buy any more video games or clothes? Do gifts for friends and family come out of the child’s money or yours? Who pays for library fines, movies and bowling with the church youth group?

It’s important to set clear parameters around expectations for the allowance. You may want to write down these guidelines to serve as a helpful reminder for your child and to avoid potential arguments about who is supposed to pay for what.

For younger kids, simple is best. “Your allowance has to cover your donations to the animal shelter, candy, iTunes purchases and saving for the American Girl doll you’ve been wanting.” As kids get older and their allowance increases, they can take on more responsibility for the expenses involved in their various activities.

If there’s a conflict, sit down together to figure out where the confusion lies and agree on how to handle the expense going forward.

They need some guidance and supervision in managing the money. If you’re hesitant to give an allowance because you envision a living room entirely covered in silly string, stop panicking. You are still the parent and you set the rules. If you don’t allow toy guns, rap music, or artificial colors and flavors then you don’t have to give up enforcing those bans just because your child has money to spend.

Once the ground rules are set, help your kids learn about managing cashflow to meet short- and long-term needs by implementing some version of the “bucket system” (dividing money into different categories based on its use). Allowance can be divided equally between saving, spending and charity, for instance, or for older kids specific percentages devoted to short-term goals (new video game system); long-term goals (car or college); giving (church or philanthropy); and fun (everything else).

For younger kids, stashing cash in clear, plastic containers with the category label makes it easy for them to see how their savings are accumulating. It also helps them understand that if their last few “Spend” dollars go to a new Super Smash Brothers character today, they won’t have more money to spend until next week (or month).

Older kids can deposit money in multiple accounts or one, but do keep the bucket concept. I recommend multiple accounts because it’s such a great way to track progress toward goals and monitor spending and budgets. (I use this strategy with adult clients too.)

They must also have the freedom to make their own choices — and their own mistakes. An allowance provides financial experience in a low-stakes environment, including some of the less enjoyable lessons of money management. These lessons are crucial if kids are to acquire the understanding and self-control necessary for financial success as adults.

Let kids make self-directed financial plans and decisions from an early age. Arm them with your friendly advice, but then back off. How should you follow this rule in practice?

● By biting your tongue when your advice is being ignored and you see disappointment coming.

● By letting your children experience not having enough money to do or buy something they want because they chose to spend the money on something else.

● By allowing for the possibility that your child really does value that ridiculous game/toy/food/gift/activity/brand enough to spend their money on it.

● And by once again biting your tongue when you want to say “I told you so” if it turns out that you were right about the decision being a poor one.

And really, the decision was not a poor one at all. Rather, it was an incredible value. The opportunity to make the decision, spend the money as they chose, experience the consequences and then regret that choice (or not) is worth SO MUCH MORE than the $6, $60 or $600 that your child lost in the process.

But how much should I be giving my kid as an allowance? This is the real question for many parents. Ideally, an allowance covers everything kids need to do with the money and some of what they want to do with it. This optimal range fosters good financial management skills and a healthy relationship with money, and not so much frustration that they lose motivation.

The family’s economic and social position plays a big role in determining the right allowance. Kids shouldn’t get so much money that their spending ends up creating a luxurious “lifestyle” that exceeds that of their parents, adjusting for age of course.

They also don’t need to get an allowance that creates any type of financial hardship for parents. They do, however, need to have enough for age-appropriate social spending that roughly matches that of their peers (unless those peers represent a very different financial status, for any reason).

As a rough rule of thumb, the going rate for allowances is about $1 per year per week, meaning a 6-year-old gets $6 a week and a 15-year-old gets $15. But that’s not always possible, nor is it necessary.

Learning to work within the budget you have is financial priority number one for both kids and adults. Besides, an allowance is a learning tool; one of the things kids can learn is that they want to increase their earning power by doing yard work or babysitting, getting a part-time job or acquiring skills and education that will lead to higher income down the road.

And if your family’s financial picture allows for considerably more? You might want to set a higher allowance if your child’s friends typically have a lot of money at their disposal, with the expectation that more is devoted to philanthropy and saving as well as more for social spending and the kid version of luxury goods. Then again, you might want to stay with the dollar-per-year standard so your child learns to work within a more typical budget.

Whatever you’re comfortable with is fine. Just focus on setting clear expectations and following the four basic rules of allowances, and both you and your kids will be okay.

This article is excerpted and adapted from Financial Education Resources for Parents, a guide I created to help parents raise financially savvy kids. To receive your own copy of this comprehensive resource, click here.

Meredith C. Moore, Registered Representative, offering securities through NYLIFE Securities LLC, Member FINRA/SIPC, A Licensed Insurance Agency. 1125 Cambridge Square, Suite C, Alpharetta, GA 30009 (770) 587–0281. Financial Adviser offering investment advisory services through Eagle Strategies LLC, A Registered Investment Adviser. NYLIFE Securities LLC and Eagle Strategies LLC are New York Life Companies. Artisan Financial Strategies, LLC, is not owned or operated by NYLIFE Securities LLC or its affiliates. Neither Artisan Financial Strategies, LLC, nor its advisors provide tax, legal or accounting advice. This is provided for general informational purposes only.