An Allowance is Not Free Money

Giving your kids an allowance is not a bad thing. We’ve just lost sight of what it’s supposed to be about. Allowances are not free money for your kids. Allowances are not a birthright. An allowance will not spoil your child. Allowances are necessary to teach your child how to manage money. We’ve raised a whole generation of people that did not receive allowances or were not given allowances for the right reasons, which is why we have a whole generation of adults who don’t know how to manage money.

What’s the appropriate age for kids to receive an allowance? As soon as your child starts asking you for money, and you start giving them money to buy things. That’s when they should start keeping track of their own money (with your guidance) so they’ll have enough for the stuff they need. The goal is not to control what they have and don’t have. The goal is for them to be able to make decisions about what they can and can’t afford based on their income. Pay attention to what you spend on your child. If it’s something they can buy on their own, let them.

Should we make kids work for the money? Absolutely. I’m a big fan of working for any money you receive. But please understand – this is not the point! I truly believe that making kids work for their money doesn’t really teach them to manage their money any better than kids who get it handed to them for nothing. They may appreciate it a little more, but they won’t necessarily manage it any better. We have a whole country of adults who work for their money every day and they don’t necessarily manage their money well.

How do we teach kids the value of money? I don’t believe allowances will really teach children the value of money. Allowances should be given to teach kids how to manage money. The only way a child will grow up understanding the value of money is if they see what it takes for them to live. And the only way they’re going to see that, is if you show them your bills. This is a whole other sensitive topic for many parents. I believe you should show kids what it takes for your household to run financially. Let them see the amount of money that comes in and goes out. Let them see the bills and understand that your “big paycheck” doesn’t all just go in your pocket. Once they understand what you need to do to keep the house running financially, then they’ll understand what it means when they ask for an $80 video game or a $100 pair of shoes.

How much money should we give our kids? First figure out what you already spend on your kids from day to day. How much do you give them for lunches, snacks, treats, mall trips, toys, clothes, special school events, sports, dances, etc. Then decide what you think they can handle paying for themselves. Total up the cost and give that to them weekly, bi-weekly, monthly, whatever frequency you prefer. Don’t be scared to make them responsible for even the big things like school supplies. The more they’re able manage the more you’re preparing them for the future. The trick is you being able to come up with a realistic dollar amount.

How do we teach kids to manage money? Now this is the whole point of an allowance so make sure you approach it with this mindset. You give them income and teach them how to manage that income so they can cover their expenses.

Budget Reports - One of the best ways to do this is insist on a ‘budget report’ before you give them their allowance. Make them write out how they plan to spend their money before you give it to them. If they haven’t thought about it and don’t know what to write, don’t give them their allowance. Too many people get money everyday from their employer without thinking about what their going to do with it. This is a great time to talk to them about buying needs vs. wants, saving and giving to charities based on your families personal beliefs. And then later, before you give them their next allowance payment, talk with them about how they did compared to their budget.

Let them Pay for Big Things – Many parents think that allowances should be for the little things that kids want and that the parents should manage the big things like prom dresses, sports equipment, summer camp. Let your kids handle paying for those things too. If you know you’re willing to spend $200 on a prom dress for your daughter in May, then price out her allowance to include that expense as early as the previous Fall. Remind your child that they will be responsible for this purchase and it’s up to them to save for that expense. Throughout the months they’ll be tempted to spend the money on other things, but they’ll have to learn to set some money aside for that big expense coming up. This should all be part of their budget. And if they spend all their money and don’t have enough for the dress, they’re out of luck and have to find another option.

Going through this process will teach them what they really need to know about managing money when they get older. In fact, I’ll bet that most parents need help with these same money management skills themselves.