Should you give your child an allowance?

This question has been on our minds recently, as our seven year old son continues to grow and mature. We have long planned on giving our two boys small allowances that are not tied to household chores, and now we are actually faced with a child that is nearing the maturity level to understand it.

Our son understands that money is used to buy things. In order to get an item, you have to exchange some amount of money for it. Similarly, he understands that there is only a limited supply of money. There is not an infinite amount of money—in fact, in his world, there’s not much money at all. Thus, you can’t simply buy everything you want. He knows because when he does ask for pizza, he often gets the answer “we don’t have the money for that this week”.

He also understands that different items have different prices. You don’t have to give much money for some things. However, you have to give quite a bit of money for other things. Not all items have the same price. He also understands that saving your money is worthwhile, though this lesson has been guided greatly by Mom and Dad.

From my perspective, this means he’s ready for an allowance (though my wife and I are still discussing it). On the other hand, I know other parents of children as old as teenage who don’t feel their child is ready for an allowance.

Our goal with giving an allowance is straightforward: We want to teach him the value of saving, charity, and money management through his own experiences. However, with such a decision, we are left with a number of additional questions.

First, how big should his allowance be? There is a fine balance to achieve here. It needs to be enough so that it is relevant, but not large enough so that he is spoiled.

Second, what kind of restrictions should we put on it? From my experience, an allowance given with no restrictions often winds up being spent on bubble gum, which kind of defeats the purpose. But we aim at encouraging our boy to split his allowance into four piles: Spend, save, invest and donate.

The “spend” pile is straightforward – that is his money to do with what he chooses. If he wants to take his money and buy pizza or puzzle game, he can. If he wants some bubble gum, he can buy it.

The “save” pile is similar – he can spend it on whatever he wants, but it has to be a defined future goal. Perhaps he wants a computer game, for example, or maybe he would like to buy a Christmas present for someone with his own money. This would build up over many weeks, and if he chooses, he could contribute more from his “spend” pile towards it. With this money, we can allow our son to invest some of it into his mum’s shop and be given back with interest at a later time.

The “donate” part allows him to choose every so often (once every three months or so) to give the money to a cause of his choosing. We want our son to understand that what he has is only a privilege that many others out there don’t have.

This would open the door to a lot of discussion about others in need and allow us to introduce charities to him. I read with interest recently of a child who saved for over two years and donated a whole heifer cow via Heifer International. Very touching.

Our goal in the end is to teach our children why it’s awesome to save and plan ahead. Wishing you a blessed weekend as you start giving your children an allowance, helping them build lasting personal finance management skills.