Teaching Your Children How to Save

In many families, money is a taboo topic that is not to be discussed with the children. Unfortunately this results in many children growing up without learning the basics of personal finance until they have experienced a few hard lessons.

In an effort to educate our kids about personal finance and the importance of saving money, we have implemented an allowance system. The guidelines of our allowance system are as follows:

  • Determine a reasonable amount and payout schedule. We opted for a weekly allowance schedule with an amount that is equal to $0.50 for each year of age. As an example, a 10 year old child would receive a weekly allowance of $5.00.
  • Each child has a budget for their allowance with the following categories: spending money, savings and charity. Feel free to experiment with the breakdown of each category but we have been happy with 60% towards spending money, 30% towards savings and 10% towards charity.
  • Define responsibilities and expectations. Many parents prefer to pay an allowance as a reward for their child performing certain chores. In our family, we have not related the allowance to any chores. Our children have certain responsibilities and chores that are expected of them as a member of the family and their allowance is not earned in a traditional sense.
  • Allow for the freedom of choice. Within each category, it is important that your children be given the freedom and flexibility to do as they wish with their money. Allow them to spend their money on what they want (assuming it is within the confines of any family rules) and allow them to select a charity of their choice. With this power of choice, your child will learn a level of responsibility for their money and they will make mistakes with their money but that is part of the learning process.

With these basic guidelines, you will have an allowance system in place for your children that will help introduce them to the concept of saving money, spending money wisely and donating money to those in need.

The real reward as a parent will come as you begin to see your children learn about personal finance and make choices that may surprise you, such as giving a little extra to charity here and there or sharing money with a sibling that is saving for a big purchase.

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24 Responses

  1. Matt says:

    My parents taught me quite a bit about money when I was little. Thanks for doing a how to for the Group Writing Project. My How To is up also.

  2. mnc says:

    Matt, it sounds like you were lucky to have parents that taught you about money. It seems like there are too many kids and young adults that haven’t learned many of the basics, which is part of the motivation behind this site.

  3. Jersey Girl says:

    Birthday money and Christmas money, the kids can spend half, the other half has to go in the bank. When they work, the same deal will apply…at least half of each paycheck goes in the bank.

  4. mnc says:

    Jersey Girl, you bring up a very good point about money received as gifts. Do you also have an allowance or does this only apply to gift money?

    I didn’t state it in the post but we have implemented an 80/10/10 policy on gift money where 80% can be spent, 10% goes into savings and 10% to charity.

    Thanks for sharing your comment!

  5. MamaDuck says:

    Definitely of use when Lil’ Duck gets bigger! Our how-to is up as well if you’d like to check it out!!

  6. These are some good tips to keep in mind as my children approach allowance age. At what age did you start giving them an allowance?

    We also contribute a certain amount each week into a separate savings account for each of our three children. The money is invested, and the combination of interest and regular contributions should ensure that we’ll be able to give them a very substantial nest-egg one day. I’m not sure of the best way to go about that, either – you certainly wouldn’t want to give tens of thousands of dollars to an 18- or even 21-year-old! Then again, if we’ve been able to instill a healthy attitude to money in them during their childhood, maybe they’ll use it wisely and set themselves up with a great start in life. Here’s hoping!

    My contribution to the Problogger group writing project might also interest you as a parent: How To Take Great Photos Of Children. Enjoy, and thanks!

  7. mnc says:

    Darren, we started this allowance plan when our kids were 7 and 4. We had tried an allowance earlier than that but didn’t have a good plan and it ended up falling by the way side.

    Nice idea about the separate savings accounts. We are contributing to 529 plans for college costs but have thought about what you are doing as well. As you mention, if you have educated your children about personal finance then they will likely handle that money responsibly.

    Thanks for the comments!

  8. Bee says:

    When I grew up we had no allowance because we ‘had a roof over our head and food to eat!’. I believe that kids need to learn at an early age what to do with money. The one thing that I do with the kids when they want something that is out of their budget is agree to pay for half if they save half of the money. I refuse to pay a hundred dollars for a pair of shoes but I would buy them shoes anyways we agree to pay half of the amount when they save up their half. I really enjoyed this article – my how to is on saving your money

  9. mnc says:

    Bee, thanks for the comments! Your approach of splitting the cost is a nice solution and encourages your children to save money. Once our kids are old enough to hold jobs, we plan to use a similar approach to funding their Roth IRA.

    Assuming they earn enough, we plan to match half of the annual contribution so they can maximize their savings at an early age. Hopefully it will encourage them to save while still keeping a little spending money.

  10. Olivia says:

    I like the 80/10/10 idea, as I think it is a good blueprint for real life. I should say that I was forced by my parents to save half of what I made. This made me really, really angry, so I’d hold back tips and try to subvert the system. I think that if a parent had explained to my why I was being told to do things, it would have made a huge difference.

    Very nice list.

  11. mnc says:

    Olivia, thank you for the kind words and for the insight into how you responded as a child. As your point illustrates, good communication is a key to teaching children not only what to do but why to do it.

    Looking back at my childhood, I wish I had learned some of my current saving habits at a much earlier age. If I had, my goal of early retirement would be possible at an even younger age.

    Do you think the fact that you tried to subvert the system had any lasting impact on your savings habits as you grew older?

  12. Amanda says:

    Just wondering what you thought of this website, http://www.earlyearners.com. As Darren posted, he has savings acocunt for his kids. This site advocates the same idea especially for kids since they won’t learn personal responsibility unless they “do”. Some of my friends with elementary aged kids brought this to my attention.

  13. mnc says:

    Amanda, thanks for the link to that site. It looks like it has some really good information but I need to spend more time reading through the entire site.

  14. Leslie says:

    I like much of what you do – especially the creation of several accounts and your emphasis on ensuring your kids have the freedom of choice within each category. It’s tremendously empowering for kids and teaches them so much. That’s a big part of what allowance should be about.

    Having travelled this path, I hope you don’t mind a couple of suggestions. One part I think you might consider enhancing is how you go about deciding on the amount of the allowance. 50¢ times their age is a formula bandied about on the internet a lot, but it’s really quite arbitrary and not connected to anything in the real world. I suspect your kids are young – we found this formula worked ok with younger kids (say up to age 8-9) who have no real needs, but found it quickly became irrelevant once they got a little older. For example, you’ll need to find a way of making it clear what Mom and Dad buy versus what your kids are expected to buy with their allowance, and do it in some consistent way. And even before age 8-9, there’s an opportunity to teach your kids by creating a budget that’s built on real world spending (eg rent one DVD every month, etc).

    In addition, I would suggest that by age 10, you may want to start considering a modest clothing allowance (eg allow your child to choose/buy his t-shirts), further growing this portion of the allowance as he/she ages.

    One last thing – I’m not sure how long you’ve been doing this, but these kinds of systems often start off with a lot of enthusiasm but end up stalling, despite parents’ best intentions, for one simple reason – it can be time-consuming. That why we created our website – to provide online tools to make the process consistent, logical, and most importantly – easy to do so it’s sustainable!

  15. mnc says:

    Leslie, I am always open to suggestions as I think there is always an opportunity to continue learning and hearing from other people helps that process.

    You’re correct about the problems with stalling out on the allowance. We had tried once before and had stalled out when our kids were younger. As such, we are aware of the need to stay consistent with our kids.

    Your site looks interesting and I’ll share it with the family to get their impressions. Thanks for stopping by and taking the time to share your knowledge!

  16. Joe says:

    You have some great ideas on how to start an allowance program. I agree that an allowance should start between $.50-$1.00 per year of age. Although there needs to be a tool for re-negotiating the amount of allowance as your kids grow and you expect their responsibilities to change. Check out these tips for creating a allowance contract with your kids at http://www.finance-4-kids.com/index.php/archives/33.

  17. mnc says:

    Joe, thanks for the comment. You make a very good point about the allowance being something that needs to be re-evaluated as kids get older. You have some nice tips on your site. Thanks for stopping by.

  18. sammz says:

    check out sammy at http://www.itsahabit.com
    great tools to help parents and teachers educate kids about saving. i think you will understand why a wide variety of experts and educators love the books and music.

    keep up the great work. teaching kids about money is a lifetime gift!

  19. Vince Powell says:

    Have you ever consider a mandatory program of matching a certain amount of money that your children put into savings? I think we are going to institute a program of matching all gift money, after tithing and requiring them to save it until they are independent of us.


  20. jack smith says:

    I would also recommend the series “Finance for Kidz” by Prof Dheeriya. you can check out these books at http://www.finance4kidz.com


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