Using an Allowance to Teach Kids About Money

by Michael on May 15, 2013

Photo of Pocket Money

Last week’s posts about coins (both silver and copper) were inspired by me sitting down with our boys to pay their monthly allowance.

With that as a backdrop, I thought it would be worth spending a bit of time talking about the ins and out of our allowance system.

For starters, I’ll say that we don’t tie our kids allowance to any sort of chores. Some may view this as a minor (or even artificial) distinction, but we expect them to help around the house because they’re part of our family, not because we’re paying them.

So… The sole purpose of the allowance is to help our kids learn to manage money. Instead of buying stuff for our kids when they asks for it, we pay them an allowance and then expect them to cover their own discretionary spending.

If they want a new book, toy, video game, or whatever, they’re responsible for buying it. This has worked quite well over the years, as our kids have learned how to save for large purchases, how to work together to make even larger purchases, etc. They’ve also faced the consequences of impulse spending.

To provide some structure, we expect them to stash 30% in a savings account (we consider this to be their long-term savings) and to donate 10% to a charity of their choice. The remaining 60% is theirs to do with as they please.

We also provide them with an opportunity to put extra money (from spending) in the bank — with a match from us if they choose to do so. I call this the 401(kid) plan, and I have to say that it’s been an interesting experiment. One of our kids consistently takes advantage but the others? Not so much.

Ultimately, their long-term savings will provide a foundation for their education in investing, though we’re not going to push this until they show us that they’re ready. Our oldest is close, though he’s still not over the hump.

As for amounts, we pay $3/month per year of age. At the high end, our 15 year old is gets $45/month with the freedom to spend $27/month. At the low end, our 8 year old gets $24/month with the freedom to spend a bit over $14/month.

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