During our recent financial literacy workshop for kids, which we hosted with The Seattle Foundation, we asked the participants two questions about allowance: ”Is $40 per month (the amount in our hypothetical example) reasonable for 16 year-old Eric (the teen in our hypothetical)?” and ”Do your friends have to complete chores to get one?”
For the first question, many of the kids thought that our hypothetical of $40 per month is too much for a 16-year-old. The rule of thumb many financial planners shareis half a child’s age per week. In regards to the second question, the wide-sweeping answer was laughter… apparently their friends receive an auto-allowance and the thought of having to earn this income is silly. Is this the current parenting standard, money for nothing? Not necessarily.
Quite a few parents and financial planners have strong feelings that children should earn their allowance. Perhaps the best course of allowance action is to give kids a set amount and opportunities to earn money.Whatever side of the fence you land on, allowance is important. Children important need money into their hands so they can learn how to effectively manage it.
When Nathan Dungan, a nationally recognized expert on teaching kids how to handle money, visited us at Laird Norton Wealth Management a few years ago, he spent a great deal of time talking about allowance. According to Dungan, “the goal of an allowance should be to teach your kids how to manage money. My advice: Use allowance to transfer financial responsibility and accountability to your child and to instill the Sharing-Saving-Spending philosophy.” So how do you start this three-pronged allowance approach? According to Dungan, “As soon as the child says ‘I want,’ which is usually by age 5.” Once these words are uttered, I recommend you start using a three-jar system: one for saving, one for sharing and one for spending. Deciding how much your child should get is a little tricky. Done correctly, the two allowance factors of ‘a reasonable amount’ and ‘automatic nature’ can give kids what they need to learn about money management. However, if done incorrectly, these two factors can contribute to a sense of entitlement. For starters, we suggest you keep the amount low. Provide for their needs and if there are wants, encourage them to earn money to make those purchases (you can provide earning opportunities in the home). Teaching children to earn money and the empowerment that comes along with work ethic is one of the most important contributors to wealth regeneration.