Generally speaking, using an allowance can be a great way to teach your kids valuable money habits early on in life. There is much debate over whether to tie the allowance to household chores, good behavior or other factors that are presumably within your child's control, but many experts recommend at least making a portion of what you give them a consistent amount regardless of their behavior – helping out with appropriate household chores should be expected regardless of whether you get paid, and consistency is important in solidifying some of the financial habits you're trying to teach.
One suggestion would be to have a small base amount that you give your child each week or every other week, while also giving them opportunities to boost that amount through things like additional chores, good behavior agreements or other factors. Your child's money mindset will be formed partially by observing you. One great way to have a positive influence, even if you’re still on your own personal journey to financial security, is by paying an allowance.
Here are a few tips to help make the most of the money lessons that an allowance can teach.
Be consistent. One of the greatest things an allowance can do is teach your kids how to budget, and as anyone who has fluctuating income can tell you, consistency of income is very helpful. Whether you pay weekly, biweekly or even just monthly, do it on the same day and in the same amount so they understand the value of making their money last. Caving and paying kids early could be akin to payday loans, which is the exact opposite of what you want to teach your kids.
Help them set goals. This can help them see the value of skipping short-term wants, like candy, in exchange for reaching longer-term goals like a video game. One suggestion is to require kids to put one-third of their allowance into savings and one-third toward a charitable need like an animal shelter or church, with the remaining third available for immediate spending.
Introduce them to banking. Open a savings account for your child’s longer-term savings and show them how to check their balance online, pointing out how interest (however miniscule) accumulates, allowing their money to compound. This is also a great way to demonstrate that the ‘M’ in ATM doesn’t mean “magic.” That cash gets in there somehow!
What if you don’t have the money to pay an allowance?
This is a common reason that parents avoid paying an allowance, and it's completely understandable. If you simply don't have extra money to give your children right now, there are still ways to pass along the lessons even if you can’t pass along cash:
1. Use a grocery allowance. Allow your kids a certain amount of the grocery budget that they can spend on special treats or even for foods that you need to buy anyway such as breakfast food. What better way to demonstrate the trade-offs that come with good money management than to help your child see why they can't have both the yogurt smoothie treat as well as the brand name cereal they want?
2. Keep a written tab. If you don’t always have the cash available on allowance day, simply keep a written record by adding that week’s amount to your child’s tab and then when you buy something for them, subtract it from the tab. This isn’t a bad way to go even if you do have the funds, as it’s closer to the way we are paid and spend money in modern times anyway.
3. Remember that it’s often more about the practice than the amount. Perhaps you can’t afford to pay the average $120 per month that’s the current going rate. Even just $5 a week can teach the lessons.
For more tips on how to turn an allowance into a money-management teachable moment, click here.