Giving Allowance to Teach Financial Literacy

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Recently, I’ve coached a few different moms about allowance and chores. These concepts often go together, but I think about them as two separate pieces. Today, I’ll teach you how to use giving allowance to teach financial literacy to your kids. 

Why Financial Literacy Matters

Managing money is a skill - and an important one. When you want to teach your kids how to read, you give them books. When you want to teach your kids about their feelings, you emotionally coach them about their feelings. When you want to teach them how to count or do math, you give them small items that they can count and manipulate.

So if you want to teach your kids about money, you have to give them some money. 

There are a lot of things I want my kids to learn and understand about money. In order to do that, they have to make decisions and have a lot of different experiences with money.

I want them to experience the feeling of having some money and then spending it. I want them to spend money and be thrilled by the purchase. And I also want them to have the feeling of spending money on something that’s not good quality that breaks right away or that they regret.

I want them to have the feeling of saving their money in order to get something. But I also want them to have the feeling of wanting something and not having enough because they didn't save.

I even want them to have the experience of paying for fines. Sometimes, in life, we make a mistake and we have to pay money to fix it. 

Ultimately, I want them to experience both success and failure when it comes to making decisions and spending money. This is how we learn.

The Allowance-Chores Connection

My take on allowance and chores might be a little different than you’re used to. While the two are connected, I don’t actually believe that you should pay your kids to do chores. 

Allowance is meant to teach financial literacy. Chores teach kids how to be in community. As a part of your family community, they should participate and help out…just because they live there. Both help teach responsibility.

So if you’re not paying your kid to do chores, how do they fit together?

As a member of the family, your child will have jobs to do around the house. There will be expectations for them to meet. 

If they don’t do their jobs, what happens? Often, you end up doing the job for them, and they’ll need to pay you back for the time and energy it took you to do that. 

Not doing their chore is a mistake. When you make mistakes, you have to pay for them in some way. You have to make it right. One way is for them to pay you back in time. If you did one of their chores, they can do one of yours. Another way is to pay you back in money.

For example, you might give your kid $5 a week for allowance. One night, you realize they didn’t take out the trash, so you do it before bed. The next day (or the next time you pay allowance), you say, “This chore that I did cost $1,” so they owe you that or you take it out of their allowance for the next week. 

The shift is that the amount of their allowance is set, but you are docking their pay for things they didn’t do. 

Giving Allowance to Teach Financial Literacy

These are some tips and things to think about to use an allowance as a financial literacy tool. 

Decide how much allowance you’ll give. This is a personal decision that depends on your financial situation, how many kids you have, etc. The cool thing is that when you start giving your kid allowance and stop buying extra stuff (if you have been), you’ll have a better handle on your own money.

In my opinion, $1 a week is great up until age 5-7. Then, you can raise it a little bit. We did $5 a week for a really long time with our boys. 

Once they hit high school, it was more like $20 a week, because they were paying for food, movies, bowling, etc. when they were out with their friends. Now, in college, we give them slightly more than is necessary for the week or month, and they use that to pay for any extras. 

Decide what you’re willing to pay for and what your kid has to pay for themselves. For example, if you’re going to a carnival, what will you provide? What extras does your kid have to buy for themselves? Maybe you pay for their admission or a ride wrist band or one sweet treat. Anything beyond that, they’ll need to pay for on their own. Decide in advance and communicate it clearly.

The idea is that you are still providing for them, but your child has some money for extras. 

Have a safe place to keep money. For kids 12 and under, you want a piggy bank or a place where they can physically see their money. We want to make it concrete. A bank account is a little too vague for kids this age. It’s hard for them to understand how much is there and available. 

Around age 12 or 13 is a good time to open a bank account. I really like the Greenlight debit cards for this. Monthly paper statements are also a great way to review their finances with them and get them into the habit of looking at their money - how much they have, how much they spent and how they feel about those choices. This can also lead to discussions about their financial and savings goals.

Give them some freedom. You might want to tell your kid they can’t buy something if you think it’s junk, too expensive, etc. But this is where they start to have those valuable experiences. When they feel that excitement or buyer’s remorse, it opens up a conversation about budgeting, saving, and lots of other good topics.

I’d rather see your kids buy stupid stuff at age 7 than get to college and waste a ton of money because they haven’t learned those lessons. This is how they practice. 

Optional: Set limits around what they can buy. A big one here is sweets. Your kid might be happy to spend $20 on candy. It’s okay for you to say, “You’re welcome to spend your money as long as you don’t spend it on sweets.” Or maybe they can buy sweets on the weekend, but not during the week. 

⚠️Caution: Don’t set these kinds of limits right away. Let the situation play out a bit. Let them do their own thinking, and see if they come to their own conclusion. If something doesn’t play out the way you want (in my case, my kids were buying ice cream every Wednesday with zero regrets), you can always pull back and create a new limit. 

Optional: Offer opportunities to earn more. If your kid is saving for something, you can create extra chores or jobs outside their normal responsibilities that they can earn money for. Quality control it, and make sure they do the job right. This gives them the feeling of working hard to earn something they want. 

Giving allowance gives your kid the ability to have some money in their pocket so they can learn how to spend, how to save, how to have regret, and how to feel proud. It also gives them a new way to repair their mistakes. 

Let them try, fail, succeed and learn so that they’re taking steps toward financial responsibility.

You’ll Learn:

• Why I don’t believe you should pay your kid to do chores
• Financial lessons all kids should learn
• The value of giving an allowance
• How to use allowance to teach financial literacy