Children and Money: Give an Allowance, Get Out of the Way

In my last post, I argued that you should give your kids an allowance so they can begin learning money management skills at a young age. Again, these ideas originated from Kathryn Amenta, a wonderful financial counselor. But I have implemented them in my house for years with great — and unexpected — success.

To review, you should start giving your children an allowance as soon as they can count money, usually at four or five years old. Your sole purpose in providing an allowance is to give your children an opportunity to build money skills. Allowance should not be tied to chores. They get an allowance because they’re part of the household; they do chores because they’re part of the household. When it comes to allowance, you get to make the rules and enforce them. You may have values about money that you want your kids to learn. I’ll share what has worked in my house for years.

My son and daughter get an allowance every week, like a paycheck. They receive a dollar for every year of their age — at age 7 they get $7, at age 9 they get $9, and so on. This may seem like a lot of money. Keep reading.

From that amount, my kids are required to give 10%  to charity and put 20% in long-term savings. They get to spend the remaining 70% pretty much as they wish. They have individual places to put this money. For years, we used a divided piggy bank. Coffee cans work just as well. Now we use storage containers. Every week they get an envelope with all their money with the denominations available to make the allocations. You’ll need to help them when they’re young to count and sort the money — it’s a great coin identification and math exercise.

An important note: Make sure they physically handle the money, especially when they’re young, and make them count money when they pay you back for something you bought for them at the store. You want them to have a real life experience of receiving money and watching it leave their hands. We handle actual money so rarely in our society these days. For the longest time, my kids thought that if you needed cash you just went to the ATM and got some. They had no idea that you had to put money in to get money out. So make this reality of having money come into their possession and leave it a part or your kids’ early lives, so they can transfer that experience to the non-cash-oriented world when they’re older.

With all that cash burning a hole in their pockets, sooner or later your children will want to go shopping. Take them, allowing for a significant amount of time to shop, especially early on. You want to make sure they have time to walk all the aisles, pick a variety of things, put them back, choose something else, etc. But leave their money at home. Pay for their purchase yourself, then have them pay you back when you get home. This avoids a lost money crisis and allows for experiences with sales tax, how credit cards work, paying someone back, making change, etc.

Here’s the real trick:  Do NOT judge what they buy. You can set rules and constraints, but after that, hands off. For instance, I didn’t allow my kids to buy toy guns or candy. Sometimes I will put the kibosh on yet another oversized stuffed animal. After that, they can pretty much get whatever they want. This will take much discipline on your part, but I promise it will be worth it.

This plan has incredible beauty that I never saw coming. More on that next time. In the meantime, get your envelopes ready!