As a parent of a toddler, I’ve already been asking the question “At what age and HOW do you start teaching finances to kids?”

Because boy, Lego kits are not cheap! While the LEGO movie, Star Wars and Ninjago series have lit a fun and fiery building obsession in our household (and I must admit the movies are surprisingly hilarious and fun for adults to watch, too!)… the addiction has now turned into a teaching opportunity to discuss needs versus wants, which is really challenging to understand as a 3.5 year old.

Side note Lego parenting tips:

• Do buy the Lego advent calendars like this Harry Potter set or this Star Wars one. They’re worth every penny as a family activity to build each day for a month. It was the highlight in our family to look forward to each night while counting down to a big holiday travel.
• Don’t let your kids checkout Lego dictionaries of PAST Lego kits at the library. They’re like a shopping catalog of discontinued sets that are only found as outrageous prices in underground markets!

So what’s the answer? Do I give my son an allowance and let him buy his own legos?

How do I also teach him to value and save money when the allure of buying the next Lego ninja takes hold each day?

We can all agree that teaching kids how to be financially literate and responsible is an important life skill. But how do we teach it? Do you give them money? Do you have them work to earn it?

I argue “the how” doesn’t necessarily matter and just do what works for your family.

What matters is if a child is given the opportunity to have money to learn skills: to invest, give, and spend with specific goals in mind.

All kids are different, as well as family situations. There’s not a one-size-fits-all solution.

Grab a glass of wine! Below is one of my longer posts with thoughts, resources and ideas in favor of providing an allowance or other opportunities to make money – with some considerations thrown in along the way.

If nothing else, be sure to check out fun resources at the end of the post!

Understanding the value of a dollar

One argument for providing an allowance is to help model the value of a dollar when given in the form of cash.

Modeling the value of money is something not to take for granted, however, it’s becoming harder to do so when everything has gone digital. Rather than counting out coins at the counter like when we grew up, kids see parents pull out a plastic card or worse yet, touch their phone to a device to magically make a purchase!

To combat this, I think it’s important to find ways to use cash when making purchases to help kids see money being handled and not just a card being swiped.

Giving a cash allowance can help combat against constant bombardment of instant gratification.

Concepts of Saving and Budgeting

Once a child receives money, the next step to let kids understand the value of a dollar is to have them make purchase decisions. You can go about this a few different ways:

1. If there’s something a child wants to buy and their heart is set on it, have them research the price ahead of time, think about whether they really want it over a period of time, count their money, then go to the store and buy it when they’ve saved enough.
2. Another way to introduce budgeting is to go to the store without a specific item in mind, but rather, give them a specific amount that’s available to spend (a shopping budget). This is handy in our family when shopping for birthday presents for others. When my kiddo goes to pick out a toy for a friend’s birthday, we tell him he has x amount to spend. He knows to look at the numbers and pick something that is under x number. This technique has helped teach our 3-year-old the difference between cheap and expensive.

In either scenario I have to be clear with my son about the shopping goals. When going into the store, it’s very easy for my son to ask for toys beyond the initial agreement, but as long as he’s reminded of the mission, it usually redirects him back on track after being seduced by the power of marketing.

How To Talk About Money

Opportunities, like the budgeting ones above, help us talk to or son about money often. He knows words like budget and investing in savings. Even though he doesn’t quite get the concepts yet, we’re planting the seeds now.

I also try to keep in mind how I talk to my kiddo about finances will directly impact their relationship with money as an adult. As someone who struggles with a scarcity mindset, I strive to model healthy financial behavior. I try make a conscious effort to assure my son that we have plenty of money for our needs, and many wants. Simultaneously I also try to foster gratitude and balance when he’s shown an environment of abundance. It’s a hard line to navigate… and I continue to learn as I go.

My Childhood Experience

As a child, my personal experience with allowance was as follows; rather than a fixed weekly sum of money, I was randomly given a chunk of change for going above and beyond the regular household contributions. This approach encouraged me to do what needed to be done rather than expecting I would be rewarded monetarily for everyday chores. Instead, I felt a sense of pride and accomplishment in hard work, especially when my efforts were noticed by my parents. Often, the money was given after the fact, and I didn’t go into the job knowing I’d be paid!

Working without expecting payment helped foster an environment of gratitude rather than entitlement, but I must admit I was a pretty self-driven child. While it may have worked for me, I recognize this is not the answer for all kids. Especially those of us that could use more daily discipline engrained as habits.

Allowance Pros and Cons

With my personal experience in mind, here’s an overview of the pros and cons of providing an allowance (this section was helped by Chat GPT for fun!).

Pros:

1. Financial Education: Gives kids the opportunity to learn about money management, budgeting, and saving from an early age.
2. Responsibility: Encourages a sense of responsibility as they manage money for various needs.
3. Independence: Fosters independence by allowing them to make spending decisions within a given budget.
4. Life Skills: Teaches important life skills such as prioritization, planning, and delayed gratification.

Cons:

1. Entitlement: There’s a risk of developing a sense of entitlement if not coupled with an understanding of the value of money.
2. Dependency: Some argue that it might make children financially dependent rather than fostering an understanding of earning.
3. Unequal Comparisons: Sibling comparisons and potential jealousy can arise if allowances differ among siblings.
4. Not Always Reflective of Real-world Earning: In the real world, income is earned through work, and an allowance without an exchange of labor might not fully mirror this reality.

At the end of the day, individual family dynamics and values are most important when deciding on allowances for kids.

Ways To Provide An Allowance

Here are 7 methods to consider when providing allowances to kids (another section aided by Chat GPT):

1. Fixed Weekly Allowance

A consistent amount of money provided on a regular basis, such as weekly or monthly, regardless of chores performed.

Some families give a dollar amount based on the age of the child. A three year old might receive $3 a week while an eight year old would receive $8.

• Pros: Simplicity and predictability for both parents and children.
• Cons: May not directly link effort with reward.

2. Task-Based Allowance

Children earn money by completing specific tasks or chores. For example, a parent might agree to pay their child $2 for every set of chores completed, such as washing the dishes and vacuuming. The amount earned is directly tied to the number or type of tasks the child successfully accomplishes.

• Pros: Teaches kids the correlation between work and income.
• Cons: Risk of entitlement if not balanced with a sense of responsibility.

If this method interests you, a good friend of mine, with THREE kids to keep track of, recommends the following chore charts:

• Dry erase chore chart– lists a month’s worth of chores, breaking them down by daily and weekly chores. Chores are marked by a dry erase marker.
• Checklist board for daily routines– this seems perfect for morning or afternoon routines to give kids independence with a little guidance! There are buttons that toggle back and forth on each step, so there’s no upkeep like with a dry erase board.

3. Savings Match

Introduces the concept of doubling your savings, such as receiving a workplace retirement match. Excellent to encourage older kids to save for specific goals like college or purchasing a car.

For example, say you’ve put away 5k for buying your kid their first car. Don’t tell your kid this. Instead, tell your child you will match every dollar they earn for a new ride up to $5,000. You’ve doubled their spending budget while teaching them life skills!

• Pros: Encourages saving by matching a percentage of what the child saves.
• Cons: Complexity in tracking savings and matching amounts.

4. Commission System:

A commission-based allowance allows children to earn money by taking on extra tasks or projects beyond their regular chores. It introduces the concept of earning through additional efforts, teaching them the value of initiative and hard work. Probably the structure most closely related to how I grew up. I never expected payment, but it was exciting when it came!

• Pros: Associates allowance with completed tasks, mirroring the real-world earning structure.
• Cons: Potential for inconsistency if tasks vary in difficulty or frequency.

5. Hybrid Approach

A combination of a fixed weekly allowance with a commission or task-based system. A set amount of money is provided each week with the possibility of earning extra. This incentivizes ‘going the extra mile.’

• Pros: Combines a fixed base for allowance with additional earnings for specific tasks.
• Cons: Requires clear communication about expectations.

6. Financial Goals:

In this case, an allowance would be allocated to different categories (such as setting aside 50% for expenses, 50% for savings… which can be further divided such as 30% for long-term financial goals like retirement or college savings and 20% for short-term savings goals).

• Pros: Connects allowance with achieving financial goals, promoting goal-setting.
• Cons: Requires ongoing involvement and monitoring.

7. Life Skill Categories:

In the life skills category, an allowance might involve budgeting for expenses related to personal development. This could include allocating funds for books, courses, sports, or other experiences that contribute to enhancing one’s skills and well-being. It encourages continuous learning and self-improvement.

• Pros: Allocates allowance for different life skill categories
• Cons: Requires careful planning to determine allocation percentages.

When choosing a way to provide an allowance, you might pick one or a combination of methods! Consider your child’s personality, age, and your family values. It might also be beneficial to involve your child in the decision-making process to promote a sense of ownership and responsibility.

Putting It Into Practice

All the theory is great, but how do you put it into practice? Here are some example scenarios for implementation:

Financial Goals Example

However your child receives money (whether through an allowance, chores, or birthday money from the grandparents) decide on how it will be allocated.

I recommend placing cash in 2-3 jars or piggy banks, such as:

• Spend – 40% for discretionary and essentials
• Save – 40% for retirement, college, and life skills
• Give – 20% for gifting presents, donations, and charity

If given $10, then the child could put $4 into spending, $4 into savings and $2 into the giving category.

How would this translate in real life?

Once those piggy banks fill up (thanks Grandpa!), then what? Let’s put that money to work!

Once they’ve saved enough cash, I recommend opening one or more of the following accounts for your kid:

• Credit union checking and savings like this one that earns 7% interest up to $1,000 and partners with my local KEMBA credit union!
• High yield savings account (HYSA) These are often online banks that earn higher interest than traditional banks, such as 5.5% at Wealthfront as of Jan, 2024.
• 529 college savings that’s tax advantaged
• Roth IRA just for kids

The credit union is a great brick and mortar place to take your child to hand their physical cash to a bank teller.

Then, behind the scenes, transfer the money to a HYSA to earn extra interest. Many high yield savings accounts allow you to create different buckets for varying savings categories. I personally just use my own HYSA with a bucket for my son’s extra savings. (Eventually we can get him one when he’s old enough to manage it!) From there, money can be deposited into a 529 college account or a Roth IRA.

Keep in mind, a Roth IRA has to be earned income.

So in the above scenario, my child would keep $4 cash for spending (or place it in a checking account). I might end up depositing $3 into a HYSA savings account for giving or life skills, $2 into a retirement Roth account and $1 invested into a 529 college fund.

Another post on best accounts to park kids funds coming soon!

Favorite Resources

Below are handy resources on teaching kids money management in the form of bedtime reading, activities, and books for parents to further explore concepts.

Kids bedtime books:

If You Made a Million by David Schwartz.

Money Math, Addition and Subtraction by David Adler

Kids Activity Guide

7 Day Financial Literacy Guide for Kids by J.K. Calabrese. Don’t be fooled by the “down to business” sounding title! This guide is filled with games, crafts, and magical quests to teach concepts of money management! It’s an extremely easy read for adults and has a useful and detailed table of contents for folks like me that tend to skip to the parts I need that day.

The section on varying allowance types puts a delightful twist on the methods I describe above! Calabrese calls a fixed weekly allowance a magical weekly treasure as the starting point for the enchanted marketplace. Chores and tasks become wizarding endeavors! Complete a mission to earn a coin!

Anyone homeschool your kids? This book is definitely a must read!

Adult Further Reading

The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money by Ron Lieber. This book provides insights into teaching children about money, allowances, and instilling good financial habits. It emphasizes values, generosity, and financial responsibility.

The Barefoot Investor for Families by Scott Pape. Discusses separating money into three different “buckets” (same principle as the original The Barefoot Investor book). Suggests with teens close to leaving home, the bucket for saving could be used for either a home down-payment or their own rent deposit when they leave the nest. The idea is that they won’t be tempted to go for credit cards because they have their own money.

Smart Money, Smart Kids: Raising the Next Generation to Win with Money by Dave Ramsey and his daughter, Rachel Cruze. This finance book goes over how parents can provide a money matching approach for teenagers when encouraging teens to save for specific goals, like saving for college or purchasing a car.

Share Your Experience

What kind of allowance system did you have growing up as a kid? What did you like or not like about it?

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