Do you remember your first allowance? I do. My mother placed a “chore chart” on the refrigerator door and I got a gold star for every chore completed. Some chores were worth ten cents, others a whopping twenty five (this was the 1970s). I saved for toys and books, and from this learned very quickly how to budget and about the value of the dollar. But I learned some bad habits from my “gold star” allowance as well.

Sadly, money management usually isn’t something we’re taught in school. If we’re lucky, our parents have strong money skills and pass them on to us—teaching us how to manage debt, when to save, and how to spend. If we’re unlucky, we pick up our parents’ bad habits and may spend a lifetime trying to unlearn them.
We can, however, be proactive with our own children and one of the greatest teaching tools we have is the allowance.

But first let’s take a step back and consider what, exactly, an allowance means. Is it a salary that kids get paid for work done? Is it an entitlement? It can be either of these things, but consider the lessons learned from either approach: what do kids learn when they’re given money as an entitlement? Treating an allowance as a salary for work has its drawbacks as well—kids should be contributing to chores around the house as part of belonging to a family. If children need money to help around the house, it may end up as the only motivating factor toward chores (as my “gold star” allowance was for me when I was young).

However, it is possible to use an allowance as a teaching tool for saving, spending, and budgeting, and as a discussion point with your kids regarding the sources and uses of money.

How big should the allowance be? If all the child’s desires are met, there’s no need to budget and no lessons are learned. Children should have to make choices and learn to save for what they want. There is no hard and fast dollar value here, but if your kids are able to easily buy all the toys and treats they desire, then it might be useful to shrink the allowance.

How much control should I have over their spending?

Children should be allowed some degree of freedom, but there also needs to be ground rules. Parents can and should encourage savings and charitable habits.

For example, smaller children can be given different piggy banks for saving, for spending, and for charity, or even a savings account at the bank. Older kids can learn the lesson of compound interest with interest earning savings accounts. My father set up a savings account for me the day after I was born, and I vividly remember as a child being taken to the bank by him after birthdays and Christmas to deposit my cash gifts. He showed me my passbook and how much money I’d accumulated, and talked to me about the interest I was earning. I confess, my young self would rather have spent the money, but my older self remembers the lessons of saving and compound interest.

What about paying when kids go above and beyond the call of duty?

Though basing an allowance solely upon work done has its drawbacks, “extra credit” for more difficult tasks can be a good idea. In this case, pay should be based on the difficulty of the task and the time it takes to complete. Another important lesson for children is that they should get paid what the job is worth.

Allowances really only work as teaching tools if parents treat them as such. Talk to your kids about their spending and savings habits, set some ground rules, and lead by example, because your kids are watching! Strong savings habits are the foundation of a successful financial future. Give your kids the gift of financial literacy.