Your child wants to know why one friend gets $10 a week, another gets a whopping $50 — but he or she gets zero. Should you give in and pay your kid an allowance?
When it comes to helping your child learn the value of money, an allowance gets a thumbs-up from financial experts. “Kids have better money habits if they’re given a chance to make money choices,” says Roger Young, a senior financial planner with financial advisory firm T. Rowe Price. “One way to do that is to provide them with an allowance.”
In T. Rowe Price’s annual “Parents, Kids and Money” survey 66% of parents reported giving their kids an allowance. But few moms and dads simply hand over cash without a requirement, such as doing chores or earning good grades. Most report that their children have to earn their allowance.
How much is enough?
According to the survey, more than half of parents who give an allowance give $10 or less a week. But there is a wide range — one out of every 10 parents gives more than $50.
If you decide to give an allowance and your child has friends who are getting more, be prepared for complaints and requests for more cash. If those arise, ask your child to focus on his or her own money goals, says Joe Santos, a financial adviser and Los Angeles-based regional executive for Merrill Edge, the Merrill Lynch online investing platform.
It might also be a good time, he says, to talk about the futility of trying to “keep up with the Joneses” — after all, the most important factor in deciding whether to offer an allowance is your own family budget, not someone else’s.
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If you’re already giving your child an allowance but have room in your budget to meet a request for more, consider asking what would justify the raise, says Christopher Krell, a certified financial planner and principal at Virginia financial advisory firm Cassaday & Co. For example, the child could offer to take on more responsibilities in caring for a family pet.
How should an allowance be spent?
Krell suggests urging young children to earmark a third of their money for savings, a third for spending and a third for sharing or charity. “As kids grow into their teen years,” he says, “they can also learn how their savings accounts get a boost by calculating compound interest.”
“Share with your child that it’s not what they have,” Santos says, “it’s what they keep.”
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But don’t expect children to always make smart spending decisions. They might blow through their allowance right away and later realize there’s something they really want to buy, but they’re out of cash, Santos says. It’s best if parents resist the urge to bail them out. “They can learn the consequences of spending all their money too quickly,” he says.
With an allowance, children can learn how to save and earn interest on their own money until they’re ready to make a desired purchase without incurring debt. That’s a good lesson at any age.