Once you’ve given your child an allowance, are you going to dictate how they manage it? Most experts agree that encouraging some kind of budgeting is helpful. Many of the simpler systems divide the child’s allowance into three categories: money for giving, money for saving, and money for spending. This structure of budgeting basics comes all the way from advice John Rockefeller received from his mother at a young age (seems like it worked for him). I got so excited about this idea that I wrote a children’s book, Give, Save, Spend with the Three Little Pigs, that explains this concept to children using the story of the Three Little Pigs—and has a guide in the back for parents.
If you choose to use these divisions, how much of the allowance should you devote to each category? The most common split is 10 percent to giving, 20 percent to saving, and 70 percent to spending (Neale Godfrey lays this out in Money Doesn’t Grow on Trees). A similar division was proposed by First Midwest Bank in their article, "Teach Your Kids How to Budget." With very young children, I suggest a simple thirds approach: one third goes to the Give piggy bank, one third to the Save piggy bank, and the final third to the Spend piggy bank. This is easy for little children to grasp. But you can instate a more sophisticated system depending on your child’s age and the values you want to instill—for example, you could split savings into long-term savings and medium-term savings.
If your child’s allowance includes a spending category, some experts suggest creating a list with your child of the expenditures they will now be expected to cover with their allowance. Perhaps you will no longer pay for them to play the arcade games at the mall, or maybe you believe they should be paying for their school clothes. Just make sure that the allowance can reasonably cover these expectations. While you can place limitations on what purchases do not fit with your family values—for example, no violent video games or giant candy bars—it is important to give your child the freedom to spend her money as she wishes. Through their cohort, FamilyEducation.com, Life Magazine published an in-depth guide including budgeting/spending worksheets and layouts for those looking for a base to start from.
For me, encouraging contributions to my children’s savings category is very important. Beyond just mandating that your child save a certain percentage, there are ways to incentivize that saving, and to show them why we squirrel money away. Raising Money Smart Kids by Janet Bodnar suggests that families create a large family goal, like a Disneyland vacation, and that everyone contributes some of their “income” to it. First National Bank of Dad by David Owen proposes a unique approach to promoting saving and budgeting. Owen set up an allowance for his children with no mandates on where the money would go but with a clear incentive to save as much as possible: the money put into savings garnered interest at a very attractive rate he decided upon. If his children spent all their money before their next allowance payday, they were out of luck.
Which brings me to my final point about budgeting. One point of agreement among almost all the literature I read was that if your child blows all their money in an irresponsible fashion, you should not bail them out financially. You can turn their poor decisions into a moment for teaching about budgeting or prioritizing, but by all means do not give them more money to throw away. All this does is teach them that their supply of money is endless. You can reevaluate whether you need to adjust their allowance pay in the future (perhaps their allowance is insufficient to cover what you expect them to pay for), but the consensus was that monetary rescue caused harm. Your child is going to make mistakes—let them fail early, when the stakes are low.