Starting early: How to use allowance as financial education

For many families, allowance is just that — money that children are allowed to use at their discretion. But allowance can also be used as a valuable tool to give your kids a head start on learning about money, including how to budget, how to prioritize needs and wants, and how banks work. Starting early is key to building strong financial foundations. So to help you get started, we’ve put together some tips on how to turn allowances into learning opportunities.

Start with the basics

The amount of allowance you give your children is up to you, but even younger children can start learning financial management skills. Experts suggest $0.50 a week for each year of a child’s age; for example, 5-year-olds would receive $2.50 a week, and 10-year-olds would receive $5 a week. Decide on an amount and frequency that makes sense for your family, then give them their allowance in cash — this helps them to visually see their money increase or decrease when they save or spend.

Set expectations

As you discuss allowance with your kids, it’s important to establish guidelines. How long do they need to make the allowance last? Do they need to ask your permission before making purchases? Do they need to earn the allowance with chores, or is it freely given? Once you decide on terms for allowance, work with them to divide their cash into different buckets to spend, save, and give. A good target is to delegate 10% to savings, 10% to charitable giving, and the rest as spending money. This is also a great opportunity to teach your little ones about charities, nonprofits, and the importance of giving back and helping others in need.

Add in best practices

It’s never too early to set up a savings account for your child! Savings accounts give them a dedicated place for their money, and having the money safely tucked away in a savings account can help prevent impulse purchases. Savings accounts will also teach compound interest and can help motivate them to save more for the bigger things they want to buy. Additionally, tracking and monitoring their savings and their purchases can help develop both their math and banking skills. 

Develop financial responsibility

As your kids get older and more experienced in their money management, give them more responsibility and higher expectations of what they earn and manage for themselves. If you feel comfortable, increase the amount of money you give them and what expenses they are responsible for. Giving them a certain amount for lunch, clothing, and necessities each month lets them practice budgeting but also lets them fail in a safe space. The average person takes three months to get a handle on their budget, so failing is expected, and important! For example, if they spend all of their lunch money in the first week, they have the natural consequence of relying on home lunch for the rest of the month. It might seem harsh, but by doing so, you can help guide them through spending and saving for bigger expenses, like college or a car. As your child gets older and well versed in budgeting and savings, you can also introduce other categories of saving and spending, such as a checking account with a debit card or an investment account. 

Teach by example

Money doesn’t have to be a taboo subject with your children — in fact, consider walking them through your own bill-paying process and how you save. Exposing a child early to the reality of money, expenses, budgeting, and saving sets them up for success.

No matter how you handle the specifics in your home, an allowance is a powerful tool for teaching littles the value of money and the importance of saving. And we’re here to help offer resources that can make it even easier, like our downloadable Allowance Ledger that you can use to help your kids break down their budget and spending goals.

<< Main Kids and Money page