Your Child’s First Allowance: 7 Simple Tips

[ 0 ] October 17, 2013 |

Kids and MoneyAccording to an AICPA survey, sixty-one percent of American children receive an allowance. Overall, they pull in an astounding average of $780 per year from their parents’ pockets. Yet, a mere one percent of children save any of that money, meaning their new wealth doesn’t necessarily translate into fiscal discipline.

If you’re like most parents, you don’t have time to meticulously track your child’s spending. However, by taking a few steps on the front end, you can ensure your child’s finances don’t go the way of Lindsey Lohan’s later on in life. Here are seven tips for getting your child started on their first allowance.

 

1. Set an allowance

Setting the actual amount you’ll give your child each week is the most important step in this process. Too much allowance will teach them that they’ll always get what they want (not necessarily what they need), which will certainly clash with their adulthood reality. Too little could make them resentful or may have them running up to a doting grandparent for the difference!

Many experts agree that it is best to separate the idea of work and the idea of an allowance so children perform chores to be part of the family, not just to earn money. If separating chores and allowance resonates with your parenting philosophy, WebMD suggests a few helpful approaches for setting your child’s allowance:

  • Allowance by Formula: Multiply a given figure, typically $0.50 or $1, by your child’s age.
  • Allowance by Budget: Analyze how much you spend on your child’s wants or needs and arrive at an allowance accordingly.
  • Suggested Allowance: Have your child submit a proposal. Evaluate it based on your budget and values.

2. Tie the allowance to chores

An alternative to the aforementioned methods is to tie your child’s allowance to chores. The Jump$tart Coalition for Personal Financial Literacy warns against tying an allowance to everyday, regular chores that meet the bare minimum of your expectations. Nonetheless, tying an allowance to tasks that go above and beyond the norm teaches children solid work habits and the value of money.

To practice this method, come up with a list of chores and assess how much each one is worth. Then, reward your child based on the tasks they complete. A fun way to visually check off the chores is by creating a colorful spreadsheet and having them use stickers to mark off each chore they’ve completed.

3. Create a budget

Coming up with your child’s allowance rate is half the battle in terms of fiscal responsibility. The other half involves teaching your child to budget. The American Bankers Association Family Finance Adviser Neale Godfrey suggests using four containers to divide your child’s allowance into a simple budget. You can label each container as follows:

  • 10% charity
  • 30% quick cash
  • 30% medium-term (one to six months) savings
  • 30% long-term savings (like educational savings)

Each time your child receives their allowance, you can help them figure out how much of it should go into each container. Each time they go to withdraw money, you are afforded a wonderful opportunity to discuss which container best applies to each financial situation. These exercises will help your child develop sound budgeting habits that can last a lifetime.

4. Cash only

Several studies have shown that people tend to spend more money when they use debit cards as opposed to carrying cash. With cash, it’s easier to hold yourself accountable and stick to the limits of your budget. The case stays the same with children. If they can see their money as it grows or disappears, they can better appreciate the value of their money. Cash is tangibly finite. Unlike some debit cards that allow overdrafts, once cash runs out kids can clearly see that it’s gone.

5. Stay on schedule

Reward your child’s budgeting skills by staying on schedule. If they’ve made the effort to budget until their next allowance payment, then that next payment should come in as scheduled. In other words, if Sara spent her last dollar on potato chips on Tuesday because she expects mom to give out another round of funds on Wednesday, she shouldn’t have to go an extra day or two without money.

6. Tone down the zeal

Even the most experienced financial professionals make spending mistakes from time to time. Donald Trump, for example, has filed for corporate bankruptcy four times! If your child overspends on candy once in a blue moon, don’t harp on it. Consider it a teaching opportunity instead of a chance to punish them.

7. When it’s gone, it’s gone

On that note, be sure to let your child experience the natural consequences of their financial mistakes. To demonstrate the impact of overspending, do not give your child extra money under any circumstances. Teach them that they must wait until the next allowance period for additional funds. This will prepare them for adulthood, when they’ll have to budget around paychecks.

Final Word

An allowance can be an important tool in developing your child’s financial literacy. To maximize its benefit, you’ll want to ensure you offer an adequate, not excessive, sum. Depending on your philosophy, you may want to consider offering an allowance tied to chores to simulate the adult working world.

Either way, be sure to create a budget and only use cash to make spending more tangible. Be consistent with your allowance schedule, but try not to be overly strict when monitoring their spending. Finally, when they run out of money, turn that moment into a lesson based on natural consequences by not giving in to any demands for more cash.

Keep these tips in mind and your child will surely be on the right track to lifelong financial responsibility!

Damaris Olaechea is a staff writer for NerdWallet, a personal finance website dedicated to giving you with the right tools and information for your children’s college tuition planning.

Tags: , , , , , , , , ,

Category: Kids, Money Tips

About the Author ()

We’re the nerdy friend you can count on and trust, no matter your money question.

We create user-friendly tools, crunch numbers and give you all the results, unfiltered. Across banking, credit cards, education, health care, insurance, investments, mortgages, shopping and travel, we offer data-driven tools and impartial information to help you make solid decisions about the money you work hard to earn. In short, we do the homework so you don’t have to.

Leave a Reply

Time limit is exhausted. Please reload CAPTCHA.