Teach Kids Money! 3 Tips to use an Allowance to Teach Personal Finance | Financial Fatherhood

One of those tough parenting challenges is trying to get your children to understand the value of a dollar. You want them to be provided for but don’t want them to feel entitled or think their toys or video games just appear out of thin air. Most importantly, you want them to be prepared for the future. One day, they’ll be out of the house with their own jobs and paying their own bills and you want them to be prepared and understand how to make smart financial decisions. Well, one of the easiest ways to help children start young is with an allowance. But how do we use an allowance to teach personal finance without instilling entitlement? 

Tip #1) Tie Allowance Earnings to Specific Tasks

One of the most common critiques you’ll hear about providing an allowance is “it undermines teaching the importance of contributing to a family” and that can be true. If you tell your kids they get “oh so many” dollars for doing the chores you already expected them to do, they may think the only reason to do those chores is to earn an allowance. Then the incentive is money and not to help the family which may go against your parenting philosophy. Even worse, they could possibly come to the conclusion that they’ve earned enough allowance and decide not to do the chores at all. Now, where do we go?

One way to avoid that is by giving allowance with Results Based Earnings. By that I mean, we only pay out an allowance of a certain amount per specific task accomplished, such as $10 for mowing the lawn or $5 for vacuuming the living room. Whatever jobs you need done, you set a value per task and offer to pay per task when you need it done. The easiest way to do this is by creating a Job Sheet that lists the jobs to be done with associated values. Something like the chart below;

Then, you can show it to your children and they can pick different jobs each week to earn extra money. 

So how do we keep from undermining family contribution? You simply don’t include their regular chores in the job sheet. One way to do that is by creating a clear distinction between paid jobs and what’s considered familial responsibilities.  For example, you likely want to have your children be responsible for their own rooms being clean or their own laundry. You want them to be responsible for their own space and belongings. Maybe you require them to clean up from dinner. They benefit from eating a meal you cooked, so they have to clean it up. Fair share in the meal. Now your job sheet can have chores outside their normal responsibilities. Maybe you pay them for certain yard work or even deep cleaning shared spaces. These chores are more irregular, so they’re easier to differentiate from regular weekly or daily tasks. The big thing is expressing the difference between the two types of tasks to your children so they can understand why they may or may not get paid.

Tip #2) Charge them a “Family Tax”

No matter what job you do or how you earn your income, in the real world you have to pay taxes. It’s all part of being a citizen of a country. So what better way to prepare your kids for the real world than charging them taxes on their allowance? Now, how this “Family Tax” would work is you determine a certain percentage of their allowance to be taken as taxes, just like real taxes. To break that down, let’s say your Family Tax is 30%;

Family Tax is 30% of Allowance

Little Taylor earns $10 in Allowance

Family Tax = $10 x 30% = $3

Little Taylor keeps $10 - $3 = $7

So in our example, when Little Taylor makes $10 in allowance, she gets to keep $7 and $3 goes to Family Tax. Taylor can decide what to do with that $7 now but what do we do with the Family Tax? Well, that’s completely up to you.

Some options include;

• Paying for a Family Vacation

• Taking a Family Vote for what to spend it on

• Place it in a Savings Account in your Child’s Name

• Open a 529 College Savings Plan

You can realistically do whatever makes the most sense for your family. My personal preference is the 529 College Savings Plan (learn more about 529 Plans at this Link). I like to think of Family Tax like Social Security for children. Since Social Security is designed to save for your retirement as an adult, I consider the 529 Plan as my children’s “retirement from childhood”. Also, it helps me to ensure at least some of my child’s earnings go towards their future. I know a 529 plan may not work for your family, but I wanted to share with you our family’s plan.

Tip #3) Involve your Kids with decisions for their Money

This is the best thing about an allowance! Now you have provided your children with an opportunity to learn about personal finance in a very real way. With their new found earnings, they now have a choice of what to do with it and you have an opportunity to teach. So for a common example, when your kids want something from the store, you now can teach simple ideas by asking;

• “Do you have enough saved for that?” (Value of a Dollar)

• “That toy cost $15. That means you would have to vacuum the living room 3 times to be able to afford it. Is that worth it to you?” (Cost Benefit Analysis)

• “That’s the first toy we’ve seen. Do you think there might be another one you like more later?” (Delayed Gratification)

However, it’s so much MORE than just conversations at the store. You can give real options on how they use their money. Let’s say you pay out their allowance at the end of every month. So, on the last day of the month you can sit them down and give them some financial choices, such as;

• Buying that pricey thing they’ve been waiting for all month (Hard Work Pays Off)

• Leave the Money in a Savings Account and watch it Grow! (Compound Interest)

• Or even Invest their Money in a Custodial Investment Account (Basics of Investing)

You are now provided so many different options with what you can teach your children about their personal finance. Beyond that, you also can get your kids excited about personal finance. You can help enable them to make choices that directly affect their financial future which is incredibly empowering. The power to choose and learn from the results of those decisions can have lasting effects long into adulthood. Imagine if your parents had been able to teach you the basics of investing by offering you a Real Portfolio with Real Earnings where you got to pick Real Stocks with your Own Money?! That would be huge! Now imagine how likely you would be to keep investing into the future?

The Wrap-Up

Now before you get too critical, I understand some or all of these tips may not work for your family. You may be totally against the idea of an allowance or you don’t like having to parse out jobs for money or it may feel like too much to handle. That’s completely fine and there are plenty of other ways to teach your children about money. But if you want to use the allowance method, remember;

• An Allowance provides an opportunity for your kids to earn and learn about money while inside the household.

• Assigning jobs with different earnings teaches children the value of results based earnings. The harder you work, the more you can earn!

• Using a Job Sheet also allows you to differentiate between Paid Jobs vs. Family Responsibility

• Taking “Family Tax” allows you an opportunity to teach how the real world works and teach in a fun way.

• The Tax could also be used to guarantee that some of your child’s money is saved for their future.

• Involving your kids makes them feel empowered! The more they get the option to make choices, the more they will want to learn.

So that’s how we can use an allowance to teach personal finance. Since this isn’t all encompassing, feel free to mold the lessons we teach in here so they work for your family. However you want to teach your kids about finances can be great, as long as you’re teaching them good values. Also, growing your financial literacy alongside theirs is a great way to keep improving. So keep learning and stay tuned for more Financial Fatherhood posts! They may say “Fatherhood” but the lessons in there work for all types of parents to use and I hope they can help you. As always, Financial Literacy is the Number 1 Key to Financial Success! Keep Learning!

*Disclosure* This is NOT financial advice and I am NOT a Certified Financial Planner. All information is provided for educational purposes only and is not to be construed as advice. Everyone’s financial situation is different and requires individualized planning. Seek out a Certified Financial Planner for assistance with your own financial situation.