Money is extremely important in adulthood, but it’s a difficult concept to grasp in childhood. As parents, we can all take steps to teach the fundamentals of personal finance to our children to help prepare them for the realities of adulthood.
One of the most powerful ways to teach kids about money is to give them an allowance.
A well-structured allowance can teach kids valuable life skills, instill the importance of hard work, and provide some autonomy.
But what is a “normal” allowance for kids? How much should you give? And more importantly, how should you structure a child’s allowance?
An allowance is a regular amount of money that parents or loved ones provide to children. It’s usually given weekly, but there are no hard and fast rules for when to give an allowance.
For example, parents might choose to give their children $10 per week.
There are a few different types of allowances (see below). Parents may also attach rules to this money or provide children with total freedom with how they spend it.
For example, a parent could require that the child save $1 of their $10 allowance each week. Or, they could simply let the child make their own financial decisions with the money.
Each household is free to come up with its own structure, routine, and guidelines for an allowance.
Broadly speaking, there are two primary styles of allowance: A fixed allowance and a rewards-based allowance.
A fixed allowance is a set amount of money — $10 per week, for example — that a child will receive regardless of the circumstances. This is also called an unconditional allowance.
The benefits of this approach are that it provides children with a set amount of money, making it easier for them to budget and learn financial skills. Plus, this separates money from chores, teaching children that chores and responsibilities are just a part of life (and do not always come with financial rewards).
A rewards-based weekly allowance rewards children for completing household chores or achieving other objectives (earning a B+ average, for instance).
For example, a parent may pay their child $10 per week to make their bed each morning, clean their room once per week, and walk the family dog each day.
According to a recent survey, 59% of parents use a rewards-based allowance that children must earn. This makes this allowance type the most common.
And with good reason — the rewards-based approach can help teach children the importance of work ethic. It can also teach lessons on the consequences of neglecting responsibilities — if the child skips their chores for the week, they won’t receive an allowance!
A hybrid allowance combines aspects of a fixed and a rewards-based allowance.
For example, parents may choose to provide $5 a week plus a $5 “bonus” per week if a child maintains certain goals or completes certain chores.
This hybrid approach is becoming popular because it combines many of the benefits of each style.
Deciding how much to provide as an allowance is a major consideration for parents.
You want to provide enough that it’s meaningful (and useful) but not so much that the child has more than they actually need.
There’s no set amount that is the “ideal” allowance. It varies based on several factors, including:
In most cases, it makes sense to start with a relatively small amount of money and then slowly increase this as the child gets older.
For example, a parent might provide an allowance to their 4-year old, starting at $4 per week. They could then increase this amount by $1 each year. The child would earn $6 per week at age 6, $10 per week at age 10, and so on.
The idea here is to adjust the allowance amount to an age-appropriate level. As children get older, they can be given more responsibility — and also likely have more uses for money.
Figuring out the right allowance amount for your child is highly individual to your situation. For some general guidelines, we can look at the average allowances that parents provide.
Parents can look at average allowance figures to get a decent starting point. Of course, you should take this information with a grain of salt — it’s important to customize allowances to your children’s situation.
This data looks at the average amounts, which is why the figures are so specific (i.e., $5.46 per week). There’s no need to follow these numbers exactly. If you want to stick close to the averages, you could simply round up to the nearest dollar.
As you can see, the averages point to a few trends:
This data is in-line with expert recommendations, as well. Experts recommend $0.50 to $1 for every year of age, provided on a weekly basis.
For example, a 5-year old would earn $2.50 to $5 per week, while a 10-year old would earn $5 to $10 per week.
A good general recommendation is to start giving an allowance between the ages of 4 and 6.
The right time to give an allowance is when your child is ready. That may seem vague, but it is a good reminder that children develop at different rates.
It’s wise to start giving kids an allowance as soon as they are able to grasp financial concepts, like counting. What age your child reaches that milestone depends on many factors.
We can look to research studies to get a general idea. One study found that children can start understanding basic money concepts by around age 3 — and that many money habits are set by 7.
This data suggests that the period between age 3 and age 7 is vital for instilling good financial habits.
Then again, 3 might be too early for some children. It all depends on their development and your preferences as a parent.
There’s a big debate over whether or not it’s wise to pay children to do chores (or provide an allowance that requires them to complete certain chores).
On the one hand, this strategy could help teach children the importance of a good work ethic.
On the other, it could backfire and cause children to expect payment for responsibilities that help out the family.
If you’re struggling to decide, it’s a possibility to meet in the middle. By using a hybrid approach, parents could incentivize extra work for extra pay.
For example, a parent could provide $5 per week and require the child to complete all the standard chores they are used to. They could then offer bonus rewards for extra chores — helping with dinner or walking the dog, for example.
Financial literacy is a blanket term for money skills and the basic understanding of financial concepts.
Providing an allowance is a great way to start teaching financial literacy to children. It provides them with the opportunity to make decisions with real money. Instead of teaching conceptual ideas about money, you can teach real-world skills with real money.
Here’s an overview of what you can teach — and how — by providing an allowance.
At the most basic level, an allowance can show children that money has value — and power.
This can help children conceptualize what money means and help prepare them for adulthood.
It can also help children appreciate their parents more. When they pick out their favorite food at the store, they may start to take note of the item’s price — with a newfound understanding of what that cost actually means.
By getting real-world money each week, children will be forced to consider the tradeoffs between each decision they make. Concepts like opportunity cost, saving vs. spending, etc., all come into play.
Particularly with a chores-based setup, an allowance can help teach kids about work ethic.
Parents can magnify this effect by providing bonuses for children who go above and beyond. For example, you could offer a $20 bonus if the child earns all As at school or a $10 bonus for helping out with an optional cleaning project.
By default, children will typically see money as something that is for spending. After all, toys and candy are tempting — and money can buy those things!
But regular allowances, with parental guidance, can also teach children about saving.
This could be long-term saving, like setting aside money for their future.
But a more tangible strategy is to focus on short-term savings. For example, explaining to children how to save up for a larger purchase can be beneficial.
Maybe your child wants to save for a new bike or a ticket to the zoo. Parents can help children come up with a savings plan, explaining how much of their allowance they’ll need to save each week to reach their goal.
Allowances can also be used to teach basic investing skills (see below).
You can also use an allowance as an opportunity to teach kids about investing — while setting them up for a brighter financial future.
For example, you could ask (or require) that your child save 10% of their allowance to be invested. Or, you could provide a $10 cash allowance plus $10 to be invested.
This latter strategy can have powerful effects. $10 per week invested for a child from age 4 through age 18 could be worth over $14,000 at 18 (assuming 10% average returns, which is the long-term average of US stocks).
There are two ways to handle the actual investing:
For young children, it might be helpful to start by mimicking investing on your own. For example, you could tell your child that if they give you $3, you will give them back $4 next month. This is a faster timeline than traditional investing and may be easier for young children to grasp.
But for the most authentic and engaging education on investing (and to start off your child’s nest egg), it’s best to open a custodial investment account. These accounts are set up by the adult but are transferred to the child’s control once they become a legal adult.
EarlyBird is the simplest way for parents to open an investing account for children.
You can sign up for EarlyBird in minutes and get started investing in a prebuilt portfolio of diversified investments (such as stocks, bonds, and ETFs).
Download the EarlyBird app today to get started.
An allowance for kids presents a great opportunity to teach children valuable life lessons about hard work, the importance of managing money, and the tradeoffs of each decision we make.
The specific amount you give as an allowance is less important than how you frame the conversation and structure the allowance.
For the most impact, parents should use an allowance as a powerful teaching tool for real-life money skills. To learn more about how to improve your kids’ financial literacy, check out our article Financial Literacy for Kids.