Allowances are more than child’s play

If you got an allowance growing up you know the routine: You’d get a few bucks a week and you could spend it as you pleased. Often parents used it as a reward for good behaviour. You could argue that’s still the case today, but more and more parents are also using it as a tool to teach their kids about the smart ways to manage their money.

It’s never too early to start teaching those lessons, says Paul Lermitte, a financial adviser and author of Allowances, Dollars & Sense. “There is so much consumerism so parents need to teach their kids about money management and the understanding of it.”

But when should you start giving out an allowance? Lermitte says most parents start when their child reaches age five or six, although he knows some parents who have started allowances with kids as young as three.

Amanda Mills, the founder of Loose Change, a company that offers “financial therapy” to clients, says age shouldn’t be the only factor in determining when to start an allowance. Consider starting it as soon as your child shows interest in money, she says. “Maybe they’re always harassing the parent for more and more, maybe they need a certain doll,” she says. “That’s the time to set some limits.”

There are two common approaches to giving out an allowance—once a week or whenever the child asks for money. But in Mills’ opinion giving out money on a regular schedule is the way to go. “An automatic allowance can be part of the budget,” she says. “When there’s no fixed plan you’ll end up giving money whenever the child asks for it.”

Timing of the allowance matters too, says Lermitte. Give it out on a Sunday or Monday since most people—even kids—tend to spend money on the weekends. If the payment is made earlier in the week, the child will be less tempted to spend it all in one shot.

How much to give for an allowance will vary from family to family, but as a guide Lermitte suggests giving out 50 cents per age. If your child is six, give them $3 a week, at age seven give them $6.50, and so on.

After you’ve figured out what to give and when, you’ll need to start thinking about the financial lessons that you want to teach your kids. Many parents get their kids to save part of the payment; some even make their children give a portion of it to charity. Lermitte suggests children save 20% of the allowance, give another 10% to charity and then let them spend what’s left.

It’s important, though, to let the child spend this money as he or she pleases. “The kid should have full discretion,” says Mills. “If they want to buy he ugliest shirt imaginable, let them.” Children have to learn from their mistakes, she says. If they spend all their money at once or buy something that they later regret, then hopefully they won’t make the same financial blunder next time.

She adds that parents shouldn’t give their kids any extra money on top of the allowance since it defeats the purpose. “They will try to come up to you and ask for more, but you have to say no,” she says. “You’re trying to teach limits.”

One of the best parts about giving an allowance, says Lermitte, is that it can lead to larger financial discussions and lessons. He used to make his kids save money for their annual family trip. One year his family was going to Hawaii and he told his kids—then aged eight, 10 and 12—that they were going to the bank change the $100 they had saved during the year into American dollars, which they could then use on the trip. When they got into the office with the banker to make the exchange, Lermitte left the room. He wanted his kids to talk to the banker themselves.

He still remembers the look on his youngest child’s face when he left the office. “He came out with $60 and couldn’t understand how he lost money,” he says, chuckling. “They learned about currency, banking and all those things that adults deal with.”

Allowance should continue until the child stars working and making his or her own money, but Lermitte firmly believes that you shouldn’t pay kids to do chores. As important as it is to learn about money, children also need to learn they have responsibilities as part of a family that they need to be respect without having to be paid to do so. If a child does need extra dough one week, get them to do something that wouldn’t be considered a chore, like cutting the neighbour’s grass.

While some of the allowance-related details will differ from one family to the next, allowance itself is a must, says Mills. “It’s one of the most valuable things parents can do,” she says. “Their job is to help their kid come to independence, not buy them the latest thing. Allowance teaches that independence.”