Allowances for Kids: How Much, Why Do It and When to Start

So your kid has asked you for an allowance, but you’re not sure how much money is appropriate or how to go about it. Good news: We did some research and tapped a financial expert to learn about the benefits and the how-tos of allowances for kids. Here’s everything you need to know.

Giving an allowance is a valuable tool that allows your child to learn important financial lessons, including how to manage their money and the difference between wants and needs.

“The number one benefit of an allowance is that it introduces kids to financial concepts,” says Diane Morais, president of consumer and commercial banking products at Ally Bank. “It also gives parents the opportunity to communicate good money habits, like saving for a goal and spending only what you can afford.” In other words, you can wax on about these valuable financial concepts until the cows come home, but all the wisdom you try to impart will likely remain too abstract to a child who has never been in a position to make personal choices about how to spend money of their own. If your goal is to make these concepts more tangible, an allowance is a no-brainer: “[It’s] one of the simplest ways to teach your child how to save,” says Morais.

A T. Rowe Price survey revealed that 83 percent of parents who give their kids an allowance believe they should earn it by doing chores. The upside of this is that children see a direct correlation between effort and the money they receive. Proponents of this approach say that it prepares their offspring for the real world where they will have to, in fact, earn money. It also instills a sense of pride if they manage to save a lot of money by working hard for it.

However, many parenting experts disagree, noting that a child may decide she doesn’t need the money, and thus see no point in doing the work. Another argument against paying for chores is that contributing to the household by say, taking out the trash or folding laundry, is simply an inherent obligation to the family. In other words, chores are not going above and beyond; they’re what’s expected.

Bottom line: There are pros and cons to both approaches, and ultimately, the decision is up to you.

There’s no hard and fast rule about how much money to give your child, but definitely don’t go overboard. Per Morais, a weekly allowance typically falls somewhere in the $5 to $10 range, but the exact amount depends on the family’s financial situation and, in some cases, the responsibilities the child takes on. (More on that later.) That said, $1 per year of life (i.e., $6 for a 6-year-old and so on) is a popular formula for parents to use when calculating the amount to give a child.

And when it comes to the right age to start giving your kids an allowance, again, there’s no right or wrong answer here. In personal finance writer Ron Lieber’s book, The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart with Money, he writes that “kids who have gotten wise to the power of pestering parents to buy things are ready.” Lieber also includes other readiness indicators such as a child who can count and asks questions about money and how much things cost. Kimberly Palmer, author of Smart Mom, Rich Mom: How to Build Wealth While Raising a Family, agrees. She told MarketWatch that she recommends giving kids an allowance “as soon as they grasp the concept—around 5 years old or when they start kindergarten.”

When it comes to creating an allowance plan, you have options. One common approach is to give a chore-based allowance: This plan means that your child has to work for the money (and if they choose to snub their chores, they get nothin’). As mentioned earlier, the value of this approach is that it introduces the notion that a strong work ethic is rewarded. On the other hand, if your child’s desire to not do chores outweighs her interest in earning an allowance, you’ll find yourself in a tough spot.

Alternatively, you might opt to pay your child a set amount of money every week, regardless of the chores they do around the house. The benefit of this approach is in its simplicity; it also avoids a scenario in which your child is unwilling to be helpful and responsible around the house unless they get paid for it—decidedly not cute. A variation on this approach, courtesy of Lieber, is to allocate the allowance in specific ways. Lieber gave his 7-year-old daughter $3 weekly, but she was free to spend only $1. Of the remaining $2, one had to go into a savings jar and the other had to go into a give jar for a cause of her own choosing.

Finally, there’s a compromise between these two approaches, and that’s to give your child a set allowance no matter what while offering the opportunity to earn more money (extra credit, if you will) for doing certain things around the house that go above and beyond your everyday expectations. Here, you’re rewarding hard work whilst eliminating the risk of raising a kid who won’t lift a finger unless there’s money involved.

So those are three different tacks to take when it comes to crafting an allowance plan, but there’s really no wrong way to do it. Well, at least not as long as you are following the two golden rules below:

• Set boundaries. If you’re flying by the seat of your pants and don’t have a solid allowance plan that you can communicate to your child in clear language, you will quickly find yourself in a sticky situation. This is particularly important if you’re taking a work-for-pay approach—you know, so that you don’t end up paying your child every time he picks up his toothbrush. Beyond that—and this applies to all allowance plans—you and your child both need to be on the same page about what his money can and should be spent on vs. when you’re going to foot the bill.

• Don’t withhold allowance as a punishment. It might seem counter-intuitive that something like an allowance, which seems like a reward, shouldn’t be taken away as a consequence, but trust us on this one. Regardless of the type of allowance plan you pick, consistency is key—and when parents take away allowance for bad behavior, inconsistencies tend to arise. The end result is a situation in which your child is more likely to experience anxiety surrounding their allowance money, and that kind of negativity is not conducive to learning. After all, allowance is intended not as a privilege but as an educational The takeaway? Stick with other forms of discipline and once you initiate an allowance plan, follow through on it no matter what.

• Allowance apps. There are oodles of apps to choose from, including Renegade Buggies, a fast-paced shopping game for ages 6 to 11, and Motion Math: Cupcake, a game for slightly older kids who can learn money management skills as they run their own virtual bakery.
• Games. Morais says that games beat out traditional teaching resources because research shows the latter is typically too dull and the learning doesn’t stick, whereas “embedding financial concepts in a game makes learning feel less like learning and more like play.” Hint: The Game of Life and Pay Day are two oldies-but-goodies.
• Books. There are lots of books out there that can teach kids the value of a dollar. Emma and the Cosmophone, a free online children’s book from Ally, has a corresponding Cosmophone online game, and Rock, Brock, and the Savings Shock, written by financial expert Sheila Bair, is another great pick for kids ages 4 to 8.