My childhood allowance was critical to developing my sense of financial responsibility.  The allowance allowed me to make mistakes with money while seemly huge at the time, in the scope of life were much, much smaller.   In short, my allowance was a fundamental part of my financial education and literacy.

Allowance is a big topic and no one answer fits all families.  So let’s look at considerations with allowances for parents to consider when setting allowances.  Below are some thoughts as you get started on the allowance journey.

Age to Start
Probably around age 5.  At this age kids are grasping the idea of purchasing items such as toys rather than putting coins, bills or even credit cards in their mouth.  I frequently hear from my nearly 5 year old, “I want to go to the toy store to buy toys.”

Amount
A general recommendation often found on the internet is $.50 to a $1.00 a week per year.  Thus my four year old would get between $2.00 and $4.00.  My allowance back in the early 70’s seemed far less than the going rate among my peers.  There is an online calculator http://www.uecu.coop/wizards/calculators/life_stages.asp that I particular like because it has two parts.  The first one that helps parents decide how much based upon anticipated allowance usage/purpose.  The second section provides a comparison between allowances a parent received as a child and the amount adjusted today for inflation.  Having a formula is useful in many families with children of different ages as it is equalizer of fairness among various ages.

Chores
Some families require particular chores in order to receive allowance.  Other families have no chore responsibilities.  Some families go halfway in between.  They offer a small base allowance and then will pay extra for specific tasks around the house.   Chores can range between keeping ones room clean, cleaning bathrooms, washing dished, doing laundry, mowing the lawn, and taking out the trash.   I favor the hybrid version.  I want to achieve some financial literacy while teaching there is effort needed to earn money.

Allocation of Use
This a very personal choice for many parents based upon their own upbringing.  A general consensus seems to be that early on kids should understanding diving money up for different purposes.  For example, 10% for charity/religious institutions, 25% long-term investing/education, 25% for spending now, and 15% for moderate-term spending.

In some families kid’s allowance are for specific purposes such as for clothes.  The family includes a certain amount for clothes and the child must learn how to spread out the use.  For example, a child might want to spend a large percentage on a designer item while another kid would prefer to have many more items by purchasing at thrift store like Goodwill.  Other families might include money for a kid’s lunch, extra activities.

Piggy bank
I favor piggy banks especially ones divided by purpose such Save, Spend and Share.  Moonjar.com or Savvy Money Piggy Bank offered divided piggy banks.  I like the divided banks and using coins, especially for younger kids, to develop a practice of dividing up their resources by use.  I use the Savvy Money one with my son.  Another option in the digital world is available through online applications such as www.threejars.com.  Three jars provides virtual jars for holding money.  This is worthy way for older kids to begin to grasp how money works in the virtual world given today ubiquitous online bank options.   This is important as so much of the money we use today is digital and we touch actual currency less and less.

I’d like to thank an esteemed colleague, Linda Y. Leitz, for her book, The Ultimate Parenting Map to Money Smart Kids, for inspiring my thoughts and starting point for my research for this post.  Her book is available at amazon.com.

There are many places on the internet to get information on allowances.  Here are few to get you started.

http://www.babycenter.com/0_giving-kids-an-allowance-what-you-need-to-know_10304079.bc

http://www.webmd.com/parenting/family-health-12/allowances-children   (This article no longer available)

http://bucks.blogs.nytimes.com/2010/08/16/how-to-set-your-childs-allowance/?_r=0

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