5 Ways to set up allowance for kids to teach money management

Teaching our kids life skills is important to my husband and me. Like all parents, we want to raise our kids to be productive and responsible adults. And that includes money management. We instated an allowance for kids when they were in preschool to help them learn some money management skills.

It’s now been nearly a decade since we’ve been paying allowance for our kids, and we have a system down that works well for them.

Start allowance for kids young

Preschool seems young to start an allowance for kids, but if dealing with money is part of their lives (even in small ways) from early on, then they get comfortable with handling it. My daughter, who is the oldest, was closer to age 5 before we started her allowance, but we started my son at age 3 since we were already in the allowance-for-kids groove by then.

We pay $1 per week, per year of age. Since my son is 8 right now, he gets $8 a week. My daughter is 12 and gets $12 a week. I have their allowances budgeted into our family budget to help me remember and take the expense seriously like we do other bills.

You don’t have to pay $1 a week per year of age. Find whatever works for you and your family. Maybe 50-cents is more feasible for you. That’s fine. No matter how much allowance they’re getting, kids are still learning the principles of managing money.

Set up a money management system

I’m a HUGE fan of simple systems, so our money management system of our kids’ allowance is simple. We divide allowance for kids into three parts: spending, saving and giving. Because kids are very visual and tactile creatures, especially when they are younger, I started out and have continued distributing allowance in cash.

To keep it organized, I have one letter-sized enveloped marked “Kids’ Allowance.” Inside that envelope are three smaller envelopes for each kiddo marked with their name and either spending, saving or giving. We put the biggest emphasis on savings as they get older. For example, my 12-year-old puts $3 in spending, $7 in saving and $2 in giving each week. In order to remember how we distribute their money, I have it written on an index card in the big envelope.

Spending

We pay for most of everything for our kiddos, including clothes, food, entertainment and toys. But sometimes they have things they want that we can’t justify paying for. These days it could be expensive face care for my daughter. (Well, my version of expensive being that it costs more than $10 or $15.) Or it could be a toy my son wants but we say no to because he has so many. Those are the types of things they can use their money for. One time, my daughter used some of her spending money to treat herself to an Icee at the movie theater.

If I know that we are going out shopping or doing something they want to use their spending money for, I grab the spending envelopes and put them in my purse. Sometimes they want to make a purchase while we’re out without their money or online. For those times, I pay and then they pay me back from their money. It works either way. (I will admit we’ve done this a few times and I haven’t taken their money afterward.)

Another option we sometimes do is split a cost of something. If there is something a kiddo wants that is more expensive, we can make a deal that we will pay a portion and then they pay the other portion.

Savings

Not too long after we started allowance for our kids, we set them up with children’s savings accounts. So when their savings money starts building up in the envelope, I deposit it into their savings accounts. Sometimes, like during 2020 when our buying changed quite a bit, I add some of their spending money into their savings as well if it starts building up.

Our kids are allowed to use their savings, but it has to be for a really compelling reason of something they need and are unable to save up for otherwise. Withdrawing from savings also requires a discussion between the child, my husband and me. We go over options for them and talk about the pros and cons. We’ve only withdrawn from a savings account once or twice so far. As they get older, they’ll need that money more for bigger expenses like cars, books and living expenses in college.

Giving

One of the neatest things we’ve seen happen through our system of allowance for kids is how they use their giving money. We have talked with each of them about how they want to use their giving money. They have the option of giving it to church, using it to help others in need or donating it to a good cause. When we started this with my daughter, I figured she’d want to give it to church. But one of the options we shared with her was about food pantries and how some families don’t have enough to eat. She was immediately drawn to that.

As a result, our family has been quite involved in donating to local food pantries and partnering with them. Just last year my daughter did a school project about hunger and how her classmates could help. She’s organized food drives at church and at school. I love how much has grown from this allowance category!

Most recently, my kids asked to use their giving money to donate to Team Seas to help remove trash from the oceans. They have also used it to go toward building wells for areas of Africa that are without access to clean water. Giving has become our favorite part of allowance — and that’s the truth!

Don’t pay for regular chores

My children don’t get paid for their regular chores like cleaning their rooms, cleaning their bathroom, picking up after themselves, doing dishes, folding laundry and doing other tasks we ask them to do. Those are expected in our family and considered to be part of family life. Life is easier when we work together!

We have sometimes (but rarely) paid for extra chores. Both sets of grandparents have done this as well, and I’m OK with that. I have told my kids that I will withhold part or all of their allowance if they don’t do their regular chores like they’re supposed to. But, I’ve only come close to doing that twice and have never had to actually do it.

Another reason I don’t like paying for regular chores is that then my kiddos would think the chore is optional. If they’re not motivated by money (and most younger kids aren’t), then they are happy to not do the chore and not get paid. So, we don’t pay for chores in our family.

Talk about the importance of saving

When it comes to allowance for kids, we have found that we need to talk most about savings. Our kids easily understand spending money and giving money, but savings is a bit more obscure. I have one child who is a natural saver, and one who is more impulsive. Talking about what they are saving money for and why is important so they understand.

Our kids have saved money short-term and long-term. We have short-term savings when they want to save up and purchase something specific. My daughter, for example, went through a phase when she was around 7 or 8 that she wanted to buy lots of furniture and accessories for her dollhouse. She’d save her spending money until she had enough to buy the next item she wanted.

But both kids have long-term savings as well and need a bit more help with understanding why. That’s the money we put in the bank for them and then they have to have a really compelling reason to withdraw right now. We talk about the things they can use the money for later when they are older. Helping them understand that having some money saved back for bigger purchases yet to come is important. Long-term savings doesn’t come naturally to kiddos.

Share money lessons you’ve learned

We don’t talk lots of details about our finances with our kids. But we have shared lessons we’ve learned and lessons we’ve seen others learn as well. Kids understand concepts better when there is a story and person involved. You don’t have to share only lessons learned the hard way. For example, we have explained to the kids that we budget our money to make sure we are covering our expenses for necessities first. And they also know about some times we saved money to purchase something.

Our money lessons have also included the importance of research before making a big purchase or financial decision. Recently they heard us talking about refinancing our mortgage payment for a lower interest rate and such. We explained why we made that decision and the benefit it had to our family. (Seven fewer years of payments for the same monthly amount.)

We don’t include our children in discussions about finances that they don’t need to be part of. I never want my children to draw inaccurate conclusions and worry about whether we have enough money to take care of them or anything else. But I do want them to have a concept of how money works and how to manage it responsibly. An allowance for kids gives them a chance to put those lessons into practice in small ways now that will benefit them in the future.