Teaching Kids to Budget: Allowance Dos and Don'ts

by Rob Bertman, CFA®, CFP® in Budgeting
October 26, 2023
teaching kids to budget allowance

Teaching Kids to Budget: Allowance Dos and Don’ts so your kids don’t end up entitled/spoiled brats

You might be teaching your kids to budget the wrong way. But don’t worry. We’ll get you all the answers right here!

I’m sure you’ve come across the basics of giving kids an allowance. Use the spend, save, donate buckets. Maybe you’re paying them for chores, maybe you’re not.

But many parent I talk to don’t realize that they are also sabotaging the very money lessons they’re trying to teach their kids.

Why teach kids to budget?

Teaching kids to budget is the primary way to make sure they become financially independent and develop great money management skills.

Learning how to budget is the most important piece of their financial education, because if they don’t understand how to have money left over at the end of the month, it doesn’t matter if they learn how to invest, the importance of having an emergency fund, and why to avoid credit card debt.

The number one most important aspect of financial literacy is teaching kids how to budget their money.

The biggest mistakes parents make with allowance

biggest mistakes with allowance

These common mistakes parents make when giving their kids allowance can actually lead to poor money management skills rather than helping them develop healthy financial habits.

Not giving them enough money (or giving them too much)

How much allowance should you give your kids? It will have a dramatic impact on what lessons they will learn from this process.

They’ll lose interest if you don’t give them enough, because they can’t get the things they want.

If you give them too much, they’ll be able to get what they want when they want it which defeats the purpose.

The amount of allowance you give your kids should be enough money for them to buy things they want without having to wait too long but not too much where they don’t have to make choices or wait a little bit to get what they want.

Continuing to buy things for them

If you offer to get something for your kids, they will almost always say yes.

But if they have to do it for themselves or use their own money, it might not be worth it. That is the true test of how badly they want something.

The point of giving kids an allowance is to help them make spending choices with their own money and decide if it’s worth it.

The tough part for parents is seeing the disappointment in their kids’ eyes if they really want something (like a toy) but don’t have enough money to buy it.

Buying that toy anyway could send the wrong message if you’re trying to teach your kids solid money habits.

It’s better to go home, talk through how much they have, and how long it will take to have enough. Besides, they might change their mind in a day anyway.

Giving more money on request

Most parents I talk to don’t want to be their kid’s ATM. Yet, often the actions enforce the opposite.

They’ll send money to ther kids when requested so they can grab a meal with their friends, buy clothing, get something online, etc.

If you want to teach budgeting to your kids, they’ll need to run out of money with no bail out so they can learn about the choices they need to make.

Even if it’s only a few dollars, put the kibosh on giving them money when they ask.

Being your kids’ ATM will not help them develop financial responsibility.

Also, studies show that people who get paid more frequently end up spending more money and have more trouble saving money. That’s what giving money on request will lead to as well.

Telling them how to spend their money

Surprise! Your kids might want to spend money on things that you think are a waste of money.

However, it is critical to keep your judgment out of their spending choices.

Trust me, I know it’s hard to see the money spent on apps or things they only play with for a few days or clothes that end up in the depths of their drawers.

It is so important for your kids to learn these lessons at a young age and when the stakes are low.

Paying for chores or behaviors

Now, I can understand why parents might pay their kids for chores.

“Money comes from work!” or “We want to reward good behavior.”

Believe it or not, this can send the wrong message to kids especially at an early age.

It creates a financial incentive when there doesn’t have to be one. Plus, it creates the expectation that they only have to do things if they get paid for it.

The other side effect is that you have a kid that doesn’t care about money and doesn’t see the value in doing what they should be doing anyway.

The initial purpose of teaching kids to budget their allowance is to teach them how to spend money responsibly, in alignment with what they love, and show them that they have to make choices.

Yes, money does eventually come from work, but they first need to understand how spending money works.

Using the “Save” bucket the wrong way.

The “save” money when kids are young has nothing to do with buying their first car, saving for college, or building up their Roth IRA.

Does a 9 year old understand the concept of saving thousands of dollars for a car or waiting an eternity until they can use the money? They’ll get their eventually, but that’s not the point of the save bucket for younger kids.

The purpose of it is all about teaching them about delayed gratification. You often have to wait to get what you want.

It also teaches them to plan ahead and earmark money for a future goal.

“Just wait until you see how much money you have when you’re 18!” is way to far off for them to get the concept. There are better ways to teach them about long term goals and compound interest.

The lessons kids should learn from getting an allowance

benefits of teaching kids to budget

So what are the money lessons we should be teaching our kids using allowance?

How to make money last

If the only money they get comes from allowance, they will eventually learn how to make it last.

The kids will learn on their own that they will run out of money really quickly unless they plan ahead, so they’ll learn the valuable lesson of spending only what they have.

Big purchases take time to save up

Kids will become masters at setting up savings goals while also understanding that they can’t get what they want right when they want it.

Delayed gratification to reach a savings goal will not only teach them a financial lesson but a valuable life lesson as well.

Learn how to make hard choices with money

Money is finite and financial decisions come with trade offs.

When they have to buy things for themselves at a young age, they’ll learn that they can’t have everything.

They’ll learn that they need to earn money

The kids I’ve worked with have come to the natural conclusion that allowance will only get them so far and that they need to find other ways to make more money.

They’ll start looking for a summer job or a part-time job the entire year on their own without pressure from their parents.

Getting a job is necessary if they want to afford the things that older kids want like a car, a bigger clothing budget or a gaming laptop.

Kids will develop higher self-esteem from allowance

It’s much more empowering when kids can earn and buy things for themselves rather than having it being given to them.

The look on your kid’s face when they buy something for themselves is pure elation. It’s a feeling of accomplishment and self reliance that only comes when kids establish their own system and success.

That is the start of their road to financial independence.

How do you teach kids to budget?

I talk to other parents all the time, and there are 3 major hopes we have for our children.

We hope our kids are healthy, that they become good people…and that they don’t have problems with money.

One of our fears as parent is never fully launching our kids into adulthood and having them make major financial mistakes that ruin relationships and never let them live the best life they hope for themselves.

Let’s face it, we all have made money mistakes and we know how much they can derail our goals.

In fact, when I work with parents on their budgets, many of them ask the follow up question:

“How do we teach our kids to budget?”

Teaching kids how to budget is a major responsibility we have as parents.

But many get it wrong.

That stops here and now!

Keep reading if you want to understand the dos and don’ts of allowance.

10 Do’s and 10 Don’ts to Teaching Kids to Budget Money

does and don'ts of teaching kids to budget allowance

#1: DO start with cash – DON’T start with budgeting apps

#2: DO give them a weekly allowance to start – DON’T pay them daily

#3: DO have them split into spend, save and donate

#4: DO let them make mistakes – DON’T tell them they’re making a bad spending choice

#5: DO track spending

#6: DO get started early – DON’T start before Kindergarten

#7: DO get started even if you think your kids are too old – DON’T think it’s too late.

#8: DO move them to a debit card as your kids get older

#9: DO get rid of the conventional piggy bank

#10: DO switch from a weekly allowance to a monthly allowance over time

Kids Budgeting & Allowance FAQs

budgeting and allowance frequently asked questions

Here are some of the most common questions parents ask about setting up an allowance for kids

What age should a child get an allowance?

Kids can start getting an allowance around 5-7 years old. This is around the age where they can do basic math (counting) and also understand that things cost money.

But it’s never too late to start! Even if your kids are in high school, start shifting some of the financial responsibility and choices to them.

How much allowance should I give my kids?

We give our kids $1 per week x their age. So my 7 year old gets $7 per week.

It needs to be enough money where they can buy things for themselves but not too much that they can get things right away. If you don’t give them enough, they’ll give up.

Should I pay my kids for chores?

Paying kids for chores can backfire badly. It puts a financial incentive on things that they should do anyway.

I’ve seen where the kid expect money anytime they “help” around the house, or they don’t care about money so they just don’t do their chores. Parents who pay for chores put a financial incentive around expected behavior.

We believe that kids should do things around the house because they are part of the family, not because they get paid for it.

Don’t get me wrong, it’s important for kids to learn that money comes from hard work and adding value. They will naturally evolve to wanting to work so they can earn more.

The goal of an allowance is the help kids learn how to spend money, so our kids get money no matter what.

How often should our kids get allowance?

Start weekly. It’s often enough to keep it front of mind.

But we saw something amazing when we switched our older kids to monthly. They ended up spending less money!

When you get money less frequently, you really have to make sure it lasts.

Paying monthly instead of weekly shifts more responsibility to the kids and they get a better understanding of how to budget for the future.

The hardest thing for many parents is to see kid run out in those first few months without bailing them out. But this is necessary so that kids understand what happens when they run out.

What can kids use their save money for?

The purpose of the savings jar is to teach delayed gratification. Kids learn that sometimes they have to wait to get what they want.

It’s a big deal when kids plan ahead, see their money grow, and finally have enough in their savings account to buy what they really want.

Don’t worry about the bigger financial goals like saving for college or buying a car until they’re older. If your kid is in 1st grade and you start talking about college, it will go right over their head.

What do we continue to pay for while giving our kids allowance?

It’s amazing to see what kids want when they have to put their own money up for it. They’ll say yes to anything when mom or dad take care of it, but when you ask if they’ll use their own money, they sing a different tune 🙂

Once your kids start getting their allowance, you can stop paying for discretionary items unless it’s their birthday, a holiday or other special occasion.

They should pay for toys, a video game, clothing beyond the basics, etc. For example, we give our kids a certain amount of money toward their shoes when they grow out of them. But if they want the latest, cool shoes, they’ll have to come up with the money beyond the amount we’ll pay.

This might not be practical for other families, but our kids have to pay for school lunches, because we have food at home and can pack for themselves.

However, keep paying for hobbies and activities that you want to support and other things kids shouldn’t be required to pay for like gifts for friends.

Should we use a kids allowance app?

No matter the age, they should start out with cash. Eventually they can graduate to a budgeting app for kids like Greenlight or something like that.

There’s something about touching and feeling a $20 bill vs just seeing it in your bank account.

How do we stop our kids from being spoiled if we have nice things as parents?

This is a struggle for many parents as well. How do we get the nice stuff we’ve worked so hard for while also teaching our kids that they can’t have everything they want?

This is also a golden opportunity to teach your kids the importance of hard work, keeping a personal budget, and pursuing financial goals.

But, make sure your kids know that this is YOURS not THEIRS.

You can have the latest iPhone but your kids should probably not have a nicer phone than you or the same model.

You can have the Lululemon clothing or Nike gear, but your kids probably shouldn’t get it without having to make their own financial contribution to it.

Their first car should be a used (but reliable) and we’ll put a minimum towards it.

Now this is just our philosophy, but every family is different. You can make your own choice as parents, but I just wanted to demonstrate what we do.

Need help teaching your kids to budget?

Teaching kids to budget will not only set them up for financial success but it will also make sure they aren’t having to mooch off of you when they become adults. They will build self-confidence and independence through the process as well because they are taking on the responsibility.

I help families and kids create a budgeting and allowance system that will give them the tools they need to succeed.

It includes the full system and how to support them in their learning while setting a good example without sacrificing your lifestyle.

Budgeting for kids can be customized based upon your family values, your kids ages and also their personalities.

The best way to teach kids about personal finance and give them the financial knowledge to be successful starts with learning how to spend within their means.

Schedule a 30 minute introductory call with me so we can talk through your situation and how I can help!