Children Managing Their Allowance

As I wrote in my post about teaching children how to save, we have been using a weekly allowance system for our children and have been quite happy with the results.

However, today I heard of an interesting alternative to the weekly allowance. Since the typical weekly allowance is a relatively small amount, pay your child an annual allowance. The total allowance will still be the same amount but it introduces a few additional lessons for your children to learn.

Children and Money Management.
By paying your child an annual allowance, they will have to do more planning to make their money last for the entire year. That first year they may be overwhelmed and spend everything within the first few weeks or months, but they will have to learn to manage their money if they expect to enjoy it all year.

Learning to Budget.
While closely related to the ability to manage their money, an annual allowance will lend nicely to helping your children learn the concepts of creating a budget. For instance, they may be fond of a particular type of toy and you can work with them to create a budget where they can afford to purchase one new toy every month. Looking at the big picture, they can budget the 60/30/10 split of spending, savings and charitable contributions as well.

Learning from Mistakes.
As mentioned earlier, children are bound to make some mistakes when they see that large sum of money in one pile. To be honest, many adults still make mistakes when they are confronted with a large pile of money. But by letting them make those mistakes now and learning the consequences, they will be better prepared for managing their money as an adult.

The concept of an annual allowance is appealing to me and is something that my wife and I are discussing for our children. It is still early in the year so we may be able to implement this for 2007 or we can plan it out and start fresh in 2008. What do you think about the annual allowance versus a weekly allowance for children?

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7 Responses

  1. Tyler says:

    So you mean with an annual allowance you give them a lump sum at the begining of the year and teach them how to budge over the course of the year?

    If that is so, then it is an interesting idea. I don’t think I actually ever received an allowance from my parents. Though I did make some money by helping with yard work. Eventually when I was in grade 10 I did get my first job and saved like crazy.

  2. mnc says:

    Right, with an annual allowance you would pay each child with one lump sum payment at the beginning (or any determined time) of the year and they do not receive any more allowance until the next year.

    With this approach, it gives them the opportunity to manage a larger sum of money and work on budgeting skills to make that money last for the entire year.

    I think it is an interesting idea as well and something we may implement for our children. Like you, my money didn’t come from an allowance but by getting my butt out and cutting grass in the neighborhood or other odd jobs.

  3. Tyler says:

    Perhaps when/if I have childern and you’re successful with this, I might try it out. It sounds like a good idea and it teaches them how to use their money wisely and not just spend it left, right and center.

    Impulse buying is hurtful! hehe

  4. mnc says:

    Absolutely, I will be sure to post on the site if we opt to try this out and how our kids do with it.

    Impulse buying (or the lack thereof) can be a huge factor in your success with managing money.

  5. Jon Gallo says:

    First of all, congratulations on a first class blog on money issues. We’re just starting one on kids and money at our website:

    An annual allowance might be a good idea for a late teen but we’d recommend against it for younger kids. In our two books on children and mone (Silver Spoon Kids: McGraw-Hill, 2001, and The Financially Intelligent Parent: Penguin, 2005), my wife and I view an allowance as a way to help our kids learn reflective thinking. That’s being able to think in terms of choices, alternatives and consequences. Keep track of what you spend on your kids for two weeks and then give them an allowance that shifts part of that spending to them. For example, if you are spending $5 a week on ipod downloads, start them off with a $6 a week allowance. Explain that 50 cents gets set aside for saving and 50 cents gets set aside for charity. The remaining $5 is for them to spend any way they want, but you won’t be paying for downloads anymore. So now your child gets to learn to think in terms of choices — buy downloads or buy something else or save — and consequences — if I buy something else, I can’t get all my downloads.

    We think it makes a lot of sense to increase the number of things you shift to your kids and the duration of the allowance as they older, but an annual allowance needs to be built on a foundation of reflective thinking that starts when they are young.

    Incidently, we have a free pdf “allowance tracker” on our website that can be downloaded and used to keep track of what you are spending on your kids.

    Jon & Eileen Gallo

  6. mnc says:

    Jon & Eileen,

    Thank you for stopping by and for the kind words on the site. I’ll be sure to check out your new site in more detail.

    Regarding your comments on the allowance, you basically describe the allowance system that we are currently using although we based the amount on age as opposed to how much we spend on them. But since we try to follow a “living below our means” lifestyle, we really don’t spend much on them other than daily staples and gifts.

    We have been using a 60/30/10 (spending/saving/charity) split for the allowance and it has been working well. As you mention, we have seen our kids learning that their spending decisions do come with consequences and they have started to put much more thought into how they manage their money.

    Thanks again for sharing your thoughts, in reading your site it certainly sounds like you have a good track record and a wealth of experience to share!

  7. Not sure about an annual allowance. Hmmm. I might be more inclined toward a six month allowance or quarterly. Annual is almost too long for a kid to go without receiving some sort of reward for the chores they are doing. Kids have things they want to have and do to wait that long…unless you are going to front the money. Naw, don’t like that idea either. Allowance is for work completed, not work in the future.

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