Many parents wonder if they should give their children an allowance. An allowance for kids helps when they begin to do more independent activities. It can be a wonderful opportunity for a child to learn financial decision making, saving, budgeting, and money management – lessons that many high school graduates say they wish had been taught more in school.
By giving a child an allowance, it can help them realize that they have to make choices based on their own priorities. Opportunity costs and other economic lessons can be learned with an allowance. Hopefully, an allowance will turn kids into savvy, budget wise, and money-smart adults.
Here are 4 different ways to give an allowance, along with the pros and cons, for deciding on whether an allowance is right for your child.
Four Ways to Give an Allowance
The experts state that there are four ways to allot an allowance to a child:
- Regular Allowance – A regular allowance is when the child receives money unconditionally, no chores or grades needed to earn this allowance.
- Allowance Only Given When Needed – As the name suggests, this allowance is only given when the child asks for money.
- Allowance Tied to Chores – Probably the most common form of allowance, this is where simple chores are assigned, and more are added as the child grows.
- Allowance Awarded for School Grades – Again, the name says it all. This involves paying a child for either test grades, end of term grades, or some other type of reward for school work performed.
Pros and Cons for Giving an Allowance
Many financial experts will agree that giving a child an allowance is the single best learning tool to teach financial management. However, some experts disagree on the best way to give the child the money to budget.
- Regular Allowance – A child learns to plan ahead, manage money, and make mistakes with money while the cost of money lost isn’t too detrimental. However, experts have revealed that teenagers who receive a regular unconditional allowance often view it as an entitlement and have lower financial literacy and a decreased motivation to work.
- Allowance Only Given When Needed – When a child asks for money, this is an excellent time to discuss how to be smart about money. Experts say that kids are forced to think about what the money is being used for and why they should receive the allowance. But, when a child is only given a specific amount to spend for a select item, they are not able to learn budgeting and saving.
- Allowance Tied to Chores – Creating a connection between work and pay is an important lesson for children to learn. They come to understand that having money sometimes involves hard work that they may not enjoy. An added bonus is that parents have a few less chores to do themselves. However, if a child saves up enough money or doesn’t have an immediate need for cash, they may balk at doing chores that week.
- Allowance Awarded for School Grades – If the goal is for the child to study more, awarding for grades is a perfect opportunity to achieve this goal and to teach money management skills at the same time. Additionally, there is the connection between work and pay. Finally, today’s grades influence tomorrow’s college scholarships. But parents beware that their goal must be obtainable, or the child is set up to feel that they are not smart enough or good enough in school.