Allowances are not quite as simple as they appear on the surface. Fortunately, having a plan for your allowance system doesn’t take too much work and vastly increases the impact of the allowance on your child’s financial skills.
Giving an allowance is not about enabling them to pay for themselves when they go to the movies. Rather than viewing your children's allowance as "spending money," think about it as a tool. Carefully considered, an allowance is the first and best way for children to get a chance to manage their own finances.
I’ve heard some people argue that giving your child an allowance will breed entitlement. Given without consideration, I agree that it is the equivalent of just throwing money at your child. I believe that a well-designed allowance should both fit within and help illustrate your financial values. Remember that an allowance is one piece of the larger roadmap to financial literacy, not a meaningless gesture.
The No-Allowance Option
If my reasoning for giving your child an allowance doesn’t seem compelling, you can do as economist and researcher Lewis Mandell suggests and not give your child any allowance. (You wouldn’t be alone: Christina Binkley reports in the Wall Street Journal that only about 50 percent of children get an allowance). Citing a 2000 Jump$tart survey that examined how allowances correlated to financial literacy, Lewis Mandell argues that any allowance—but especially ones given without chore-strings—only teach children to expect handouts.
On one hand, I understand his point that an allowance for kids given without thought or preparation achieves nothing (or even breeds entitlement). However, I feel strongly that with just a little effort, an allowance can be the most valuable practice run your child has at learning financial responsibility. I subscribe to the view that it’s better to fail early, when it doesn’t matter rather than later in life when mistakes are magnified and can have long-term negative effects. For example, I would rather my five-year-old blow her monthly stash of nickels on gumballs rather than running up $5,000 of credit card debt when she’s twenty. Mandell does say, and I strongly agree on this point, that if you must do an allowance, you have to make sure that the allowance is contextualized within your values and the larger financial education roadmap you’ve developed for your child.
I definitely want to give my child an allowance. When do we start?
The timing of when to start an allowance doesn’t lend itself to cute, intuitive advice like when to introduce children to money does (in other words, there’s no equivalent to “When they are old enough not to try and eat it!”). The average age recommended for starting an allowance was about six years old, with the wider range being between five and eight years old. Giving children an allowance before then might not be appropriate for their developing cognitive abilities. This reasoning makes sense to me, given that the idea of money accruing is more exciting when you are able to count. That being said, some experts advise starting earlier if you feel that your child is ready. If you are still on the edge, or would like to see more research behind the subject, Psychology Today published an article regarding the more scientific end of an allowance and it's pros and cons.