In a word: practice.
Having, saving, managing, and spending money are all skills. You can’t develop skills without practice. Kids generally don’t have a way to acquire money, so how can we expect them to develop those skills? Not just from watching, I don’t think. Humans just don’t learn that way… we require experience. And so, in order to get our kids some real-world experience with money, we give them some each week.
There are rules, of course. 10% of each week’s allowance goes to savings, for example, and another 10% goes to charity. Savings are not to be touched until they’re 18, but charity money is theirs to use as they see fit so long as it goes to a good cause. And lastly, there is no borrowing against future allowance money, at least not from The Bank of Mom and Dad; either you have the money (because you saved and/or planned ahead) or you don’t, end of story.
How much do we give them, you ask? One dollar per year of age. When they’re younger they blow the money as soon as they get it (which is the point!), so there’s no need to give them much, and as they get older we want them to be able to do more and bigger things as befits their age. There are probably other formulas that work well too, but the age-based formula has worked well for us; it’s simple and there’s never any mystery about when the amount will increase or by how much.
And now to answer what I’m sure is your next question: no, allowance is not tied to chores. Their allowance is to make sure they understand how to have, save, spend, and manage money. Chores are about good family citizenship and should be done as a matter of responsibility. Likewise, teaching kids about money is good parenting and should be done as a matter of responsibility. Thus, chores and allowance are separate and independent.
Enough about the mechanics. Let’s talk about the benefits. Getting the kids some practice handling money is the obvious and primary benefit, but there is a variety of others. Some are straightforward, but some of them might surprise you.
One easy and obvious benefits is an understanding of taxes. A child who gets $4 a week to spend learns the importance of taxes very quickly when they discover that after taxes they really only have $3.72 to spend. (Sales tax in our state is 7%.) Same for interest: their charity and savings accounts earn interest, so they very quickly begin to see how getting money and not spending it leads to having even more money. Oh, how I wish I had figured that out sooner!
One benefit we didn’t expect was an end to begging (which all by itself might be worth the money!) We didn’t start giving our kids an allowance until our oldest was eight. Until that point, any trip to a store was guaranteed to be filled with dramatic, heart-wrenching requests for this toy or that candy or some other who-knows-what. All that stopped as soon as we started giving them an allowance. Once the answer to “Can we buy this?” became “Sure, as long as you pay for it with your own money!” requests decreased dramatically. Before long they stopped altogether because they understood how buying things worked and they know how much money they had (or didn’t have).
Another convenient benefit for us (the parents) is the question of cell phones. Our oldest desperately wanted a cell phone at a young age. We decided that if he wanted to pay for it himself (at the discounted rate we get for our family plan, anyway) he could have one. He did so, of course, and has had one for a number of years now. As a result he understands that upgrading cell phones every year is a waste of money and that cell phones must be taken care of carefully (i.e. don’t jump in the pool with one in your pocket or you won’t have one until you save the money to buy another!) Conversely, our younger son has never wanted one because he watched his older brother spend all his money on his. There’s no way we could teach him that lesson ourselves - only first-hand experience could do that.
The list goes on and on. Having money that must go to charity has taught them how to think about which causes they care most about, and actually giving their own money to charity has taught them the joy of giving. They have at least a basic understanding of the value of a dollar because they know firsthand what a dollar will and won’t buy. They have learned to think critically about what they buy (do I really need a brand new copy of that video game, or will a used one do?), as well as about what we buy for the family; on multiple occasions they’ve asked why we spend extra for certain name brands when the store brands are clearly cheaper. Going to the movies with friends is something they plan for (because they need to have enough money) rather than assuming that Mom and Dad will pay for it anytime they want. As they get older, understanding taxes and interest leads to discussions about things like investing, inflation, 401ks, and IRAs. None of this stuff is taught in schools, and I believe that none of it can be understood without real-world experience anyway. Seeing them learn it at a young age is gratifying indeed.
That is not to say that providing them an allowance is all smiles and Hallmark moments. It costs money, for starters, and when you have multiple children that can add up quickly. It’s hard to hold them to their limits too; it requires either tracking how much they’ve spent if you deliver allowance money electronically or providing them with exact change every week if you provide it in cash. We’ve done both, and both are a pain. We settled on providing them money electronically and then tracking it using MoneyTrail; that way they can make purchases both in person and online, regardless of which parent they’re with. It doesn’t teach them how to manage cash very well, I will admit, but by the time they’re adults I’m not sure cash will even exist, so that’s a downside we're willing to accept.
One option you do have as kids get older is debit cards for teens. Our oldest now has a CapitalOne MONEY account, which comes with a debit card that allows him to make purchases on his own and withdraw cash at ATMs. I’d recommend taking this approach as soon as your child is old enough, as it’s a much more realistic experience than the “Bank of Mom and Dad” approach we use with the younger ones.
Probably the hardest part of providing our kids an allowance is letting them make bad purchases. As adults, we understand that the $5 toy that looks great in the package is a total piece of junk, but they don’t until they’ve bought it and broken it before they get home. We understand that candy from the convenience store disappears too fast to be worth the money, but they don’t until they’ve eaten it all in ten seconds and then realized they don’t have any money left. We understand that there are already 1,000 crayons at home that are just as good as the ones in the shiny new box, but they don’t until they want to buy something else the next day and realize they’ve cost themselves an opportunity. It can be truly heartbreaking to watch your kids go through that, but I’d rather guide them through it now than watch them make bigger and more expensive mistakes in their twenties like I did. They do learn - very quickly, in fact - so it’s definitely worth it. But it ain’t no fun when you’re going through it.
If you don’t control your money it will control you, as the saying goes. My wife and I want to make sure our kids know how to control their money when they’re adults, so we make sure they’re practicing the necessary skills now by giving them an allowance. It can be frustrating, it can be disappointing, and it can be expensive, but we’re already seeing the benefits. I believe it has definitely been one of our best investments, and I would recommend it to all parents.
Can you afford not to teach your kids about money any other way?