Paying your child an allowance provides them with many positive learning experiences. From understanding how money is earned, how much things cost, determining wants versus needs, the importance of saving, to understanding how to budget, your child can greatly benefit from the experience. Below we have provided some general considerations for paying an allowance:
When to Start: You should start paying your child an allowance when they are old enough to help out around the house. Some experts say that age 5 is generally a good starting point, depending on the maturity level of your child. Remember, earning and managing money is an important life skill to teach your kids early and often!
How Much: The amount you pay your child should correlate with their contribution and age. In addition, your kids will talk with their friends and you probably want to determine the going rate in the neighborhood by asking around. If you choose to not pay the "going rate" for whatever reason, talk to your child and explain how you arrived at the amount. If you are restricted from paying what you feel is the right amount to your own finances, explain that to your child so that they understand how everyone must live within their means.
One idea is to give your child one dollar a week for every year of age, but some parents believe that gives too much money to very young children. Some believe it's best to cut that amount in half. Whatever the amount you give should be directly related to the expectations you have about how your child should use his allowance. For example, should your child use his own money to pay for movie tickets or birthday gifts? Should your teen chip in on clothing purchases? An allowance should be enough to cover certain expenses while also allowing your child the chance to save or share some money.
What is Expected: Allowance should be earned and not given to your child. However, your child needs to understand that certain chores around the house are expected as a contributing member of your family and that allowance will only be earned for tasks done above and beyond these "baseline" chores. Once you have defined these expectations, sit down with your child and discuss them. If you have multiple children, it is a good idea to discuss this with all of them at once to ensure that any perceived inequities are dealt with. Your family unit should be a strong and supportive team. Defining how each member contributes to the success of your family team provides an invaluable life skill for your children.
Revisit: Plan on redefining your allowance expectations every six months or a year with your children. You can review how your child has been spending and saving money and discuss possible increases. Take this opportunity to impart your own values about saving, spending, and charitable contributions.
Responsibility: You need to be prepared for the times that your child does not complete the chores assigned to them. To deal with these situations it is a good idea to decide beforehand what the consequences are for not completing all assigned chores. Sit down with your child and agree upon what happens if some or all assigned chores are not completed. Teaching your child to take responsibility for their actions, or lack of actions as the case may be, is a critical life skill.
Payday: Allowance should be paid no less frequently than once and month and should be more frequently for younger children since they can't realistically be expected to manage their money for longer periods of time.
Advances? Decide if you will let your child borrow on their allowance yet to be earned. If you decide to loan her money, be sure to charge interest just like a credit union or bank would. In this way, you're teaching her the concept of debt and interest which can help your child avoid the credit problems that too many young people face.
Budget? You will need to decide how much control you will take over how your child spends and saves their allowance. However, the bottom line is that you want your kids to develop the life skills necessary to manage their own money without your help, and therefore want to let your child decide for themselves how they will budget their money as early as possible. It clearly is important that you work with them to understand the importance of saving and budgeting and how to get good value in return for their money -- remembering to balance fun with function -- but remember that part of growing up is making mistakes and learning from them.