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Why You Should Start Paying Your Children an Allowance

tax-739107_640The lack of financial literacy is a growing problem that impacts everyone from college students to upper middle class professionals to retirees. Even successful people may have no idea how to answer basic financial questions such as what happens to the value of a bond when interest rates rise? How much consumer debt is too much? And how large a mortgage can you afford?

And even without much understanding of financial concepts, many find themselves assuming greater and greater responsibility for their financial well-being and retirement with investment vehicles such as 401K’s, 529s, and heath savings accounts. A lack of financial knowledge causes both wrong actions (i.e., taking on more debt that you can afford) or no actions (i.e., keeping too much in cash because you’re afraid of a loss).

Following the 2008 financial crises, the Wall Street reform law was supposed to address the lack of financial literacy, but that doesn’t seem to have happened. And while our school system focuses on educating young students in traditional subjects like math, science, history, and writing, very few states have programs aimed at teaching basic financial knowledge.

As such, people are often forced to learn these things on their own, often the hard way, with sometimes disastrous consequences. Just ask those folks who lost their homes in the 2008 recession. A little financial knowledge coupled with a little spending restraint could have prevented home buyers from leveraging themselves beyond all reasonable levels thus protecting their financial futures. Instead, home buyers were lured by low rate loans and lax qualifying requirements and got themselves into financial binds that they couldn’t get out of.

While not necessarily a solution for the global problem of financial illiteracy, Ms. Financial Slacker and I are attempting to compensate for this lack of financial education by “home schooling” our kids in this area. By creating an allowance system, we’re teaching them how to earn money, make spending decisions, save, and invest. By using real money, they are learning how to evaluate different types of investments and how to weigh logic and emotion in purchase decisions.

Impact of Financial Illiteracy

Before we jump into our solution, let’s discuss the impact of financial illiteracy:

Increased student loan debt. As the cost of college has been increasing, average student loan debt has also been growing steadily over the last two decades. In 1993, fewer than half of bachelor’s degree recipients graduated with debt, averaging a little more than $10,000 per student. By 2015, more than two-thirds of college graduates graduated with debt, and their average debt at graduation was about $35,000, tripling in two decades. I may be in the minority, but I don’t think by itself this is necessarily a problem. But if a recent graduate starts tacking on additional debt in the form of car loans, credit card debt, and an oversized mortgage to their student loan balance, suddenly, they’re putting their financial future in jeopardy.

High levels of consumer debt. There is little that can derail long term financial stability more than consumer debt. The primary culprit is high interest credit card debt, but you should also be aware of excess auto debt and other personal loans in this category. It’s very easy for these loans to get out of hand. As of the end of 2015, for those households that carried credit card debt, the balance was nearly $16,000 with another $27,000 in auto loan debt. I remember in college how easy it was to get a credit card with almost no credit history and no income. And in no time at all, you could charge up more than you can ever repay.

Lack of retirement savings. A June 2015 Government Accountability Office analysis found that that the average American between the ages of 55 and 64 had accrued about $104,000 in retirement savings while households with members between the ages of 65 to 74, had accrued $148,000 in savings. With an average household income of approximately $54,000, that means the average household has less than 3 years of retirement saved. Even with the social security 2016 estimated average benefit of $1,341 per month, and a significant reduction in retirement expenses, the average household is well short of having enough saved for a decent retirement.

How Much Allowance Should I Pay My Kids?

I don’t remember exactly how much allowance I made when I was a kid, but I’m guessing it started somewhere around $1 per week and eventually increased to about $5 per week by the time I was in middle school. And by high school, I had moved away from an allowance to part-time jobs.

Times have changed. We pay our children an allowance of $25 per week. To earn that $25, the kids need to make their bed every day, they need to keep their room clean, and they have a few household chores including clearing the table and taking out the trash. Honestly, it’s a pretty easy way for them to earn money.

But that’s just the start. In addition to their fixed allowance, they can also earn additional money by doing extra chores around the house and outside. We also pay them to read books. They can earn another $5 for every 300 pages.

However, as we all know, income is only part of the equation. Expense management needs to be learned as well.

So from their allowance, the kids pay for their own cell phones at $10 per week. They also pay for any charges they incur at school (snacks, etc.) and any other expenses (i.e., going out with friends to movies, etc.). When we go out as a family, we the parents pay. When they go out without us, they pay.

Also, if they fail to complete any of their chores, we deduct from their allowance.

Once they have earned their allowance and paid out their fixed expenses, there’s three things that they can do with the remaining. They can spend it. They can save it. They can invest it. We encourage them to invest by matching one-for-one with everything they invest.

Why Pay an Allowance?

Sure, we could just pay for these things ourselves, and that would probably be easier, but we’re trying to teach our kids how to manage money. Setting up an allowance system allows you to create a model economy that you can use to start your kids on the path to developing financial literacy.

We focus on teaching in four primary areas:

The value of money. When someone else is paying, it’s easy to forget that the money used to buy things needs to come from somewhere. At this stage, we use actively earned income to teach value. As such, with everything you buy, you can convert the dollar cost of the item into the number of hours needed to pay for that item. For instance, when one of the kids wants to buy a new video game that costs $45, they know that they will need to work for 3 weeks ($25 per week less $10 for their cell phone) to pay for it.

Prioritization. Alternatively, if they decide to spend a portion of their allowance going out with friends, that will extend the time needed to pay for the video game. If they want to put in extra hours they can earn more money and get the game sooner. The concepts are simple enough, yet so many people seem to have trouble grasping this concept. Instead, they borrow on their credit card so they can have everything now and worry about paying for it later. Hence, the massive credit card debt problem.

Saving, matching funds, investing, and compounding. Instead of spending their hard-earned allowance money on a new video game, we create an incentive for them to save and invest. But just like in life, they have the choice. They decide how much to spend, how much to keep in savings, and how much to invest. And we match one-for-one everything they invest.

Types of investments. We facilitate their learning different types of investments by setting up individual investment accounts for each of them. We then work with them to create an investment allocation and select specific investments. And again because they are working with real money, they are vested in the learning process.

Next Steps

  1. Set up an allowance “system” with income, savings, and investing goals
  2. Set up an investment account
  3. Use matching to incentivize investing behavior vs spending behavior
  4. Track, reconcile, and review weekly
  5. Encourage your kids to read and ask questions

Permanent link to this article: http://financialslacker.com/why-you-should-start-paying-your-children-an-allowance/


  1. Untemplater

    My first reaction was – wow $25 a week is a lot! I can’t remember how much I used to get but it wasn’t much. I used to try and earn extra by doing things around the house. I like how you have your kids pay for their own phone bills and things like food and snacks when they’re out on their own.

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    1. Financial Slacker

      That was my initial reaction as well. But as we developed everything, the dollar amount started to make more sense.

      When I was a kid, my allowance was the same way. It wasn’t regular or consistent.

      With our children, we are trying to build a link between work, pay, and priorities and in order for that to have significance, we set the dollar amount relatively high.

      I expect that as they get older and start looking for typically part-time jobs, my children may realize that they can make more money with our “allowance” system than they can on the outside. I’m not sure if that’s a good thing or not, but I have a few years before I need to deal with that.


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