Beth Kobliner admits that figuring out allowance rules for her three kids was very much a case of trial and error. But the President's Advisory Council on Financial Capability member was convinced from the start that giving her children an allowance in the first place was the way to go.
"It's often a good thing to do with young kids or kids up till they reach the teenage years because it helps you begin the conversation about money," says the New York—based Kobliner, whose kids are now 17, 14 and eight. "It really is one of those catalysts for further discussions."
In her view, allowance shouldn't equate a reward system for doing household jobs.
"I definitely am not a big fan of allowances for chores," says Kobliner, who helped create Money as You Grow, a website with age-appropriate money lessons for young people. "I feel like chores should be part of being a member of a household. You make your bed, you tidy your room. I believe in making sure kids help," says Kobliner, who is the author of Get a Financial Life: Personal Finance In Your Twenties and Thirties.
Instead of day-to-day responsibilities, she rewards her children when they go above and beyond like helping to clean out the attic or painting a room.
"If you start giving money for chores, then every time you ask a child to do something like empty the dishwasher, they expect a cash benefit," she adds. "It can set a bad precedent."
Giving an allowance can have downsides.
- Kids might compare their allowance to their friends' and complain that they're not getting as much.
- It may make it more challenging to teach kids the concept of working hard for money.
- Parents might be tempted to withhold allowance for bad behaviour, though financial experts says it shouldn't be used in a punitive way.
However, there are strategies to make allowances work.
Decide on how much and how often
Kobliner says some people start giving allowances when their child is as young as three; others wait till they're five or six. There's no right or wrong, the decision is up to you.
The amount is also subjective and circumstantial.
"There are all kinds of rules of thumb: Some people give $1 for every year of the child's age, so a five year old gets $5 a week," Kobliner says.
Divide the allowance into separate jars
Get three containers and label one for spending, one for saving, and one for sharing. Kobliner suggests splitting the money up into thirds; while others suggest saving 10 percent, sharing 10 percent, and putting the rest toward a purchase.
"Dividing it up allows you to talk about the three Ss," Kobliner says. "It's important to talk about sharing with those who are less fortunate."
Determine what the allowance can be spent on
"By far the most complicated aspect of allowance is what kids should use it for," Kobliner says. For instance, if parents aren't willing to buy their kids a video game on principle, what happens if a child wants to buy one with his own money?
"It's okay to set some limits even though it's their money," Kobliner says. Just be clear about the rules from the outset.
Consider saving for something big
"Allowance can be a useful tool to teach kids long-term goals," she notes.
Canada's Financial Planning Standards Council (which is behind Financial Planning Week, Nov. 19 to 25) has other tips on how allowances can serve as a jumping-off point for other money-centred teachable moments:
- Don't let kids have everything they want. Teach needs versus wants.
- Give them responsibility to make a purchase and teach them how to count money and make sure they received the correct change.
- When you go shopping, involve kids in comparing prices so they understand how to evaluate cost and value.