Giving kids an allowance isn’t just about handing them money—it’s an opportunity to teach lifelong financial skills. A well-structured allowance system helps children understand the value of earning, saving, and making thoughtful spending choices. By guiding them early, parents can instill financial habits that set their kids up for success.
Once you decide on how much allowance to give, you’ll need to encourage them to use the money wisely. Here are five steps you can take to help teach your children about money through their allowance.
1. Decide on an Allowance Structure
Before implementing an allowance system, parents need to decide on the best structure for their family. There are several approaches, each teaching different financial lessons.
Fixed allowance: In this approach, children receive a set amount of money regularly, regardless of chores or tasks. This approach treats an allowance like an introduction to basic money management, helping kids learn how to budget and plan their spending without tying it directly to work. It can be useful for teaching responsibility and decision-making without the expectation of constant compensation for household contributions.
Earnings-based allowance: In this method, kids receive money in exchange for completing chores or tasks. This method helps reinforce the idea that money comes from work, much like a real-world job. Parents can create a list of chores with assigned values, allowing kids to take initiative and earn money based on effort. However, it’s important to distinguish between household responsibilities that are expected (like making their bed) and optional tasks that can be rewarded (such as washing the car).
Hybrid allowance: This combines both methods, giving kids a base allowance while allowing them to earn extra money for additional tasks. This teaches both financial responsibility and the importance of hard work. For example, a child might receive a weekly allowance but can earn bonus money by doing extra chores or helping with family projects.
2. Encourage Saving
One of the most valuable money lessons parents can teach their children is the importance of saving. Without guidance, kids may be tempted to spend their entire allowance as soon as they receive it.
A great way to introduce saving is through the “Save, Spend, Give” method. In this system, kids divide their allowance into three categories:
- “Save” for future goals, such as buying a special toy or game.
- “Spend” allows for immediate wants, like small treats or activities.
- “Give” teaches generosity, encouraging kids to donate to a charity or help someone in need.
Parents can also help kids set savings goals to teach the concept of delayed gratification. Instead of buying small items impulsively, kids learn to wait and save for something more meaningful. Tracking progress toward that goal, whether with a chart, a sticker system, or a banking app, makes the process more engaging and rewarding.
Some banks offer savings accounts specifically for children—such as AZCCU’s CU Grow youth savings accounts, or CU Succeed for teens—where parents can help them track their progress online.
3. Teach Smart Spending Habits
One way to encourage smart spending is by asking thought-provoking questions before a purchase. When a child wants to buy something, parents can ask, “Do you really need this?” or “Is there something else you’d rather save for?” These questions help children think critically about their choices rather than making impulsive purchases.
Introducing the concept of comparison shopping can also be beneficial. Parents can teach kids how to check prices at different stores, look for discounts, and consider product quality before making a purchase.
Another important lesson is understanding wants versus needs. Kids often spend their entire allowance on small, short-term pleasures like candy or inexpensive toys. While it’s OK for them to enjoy their spending money, parents can gently remind them of bigger financial goals.
4. Reward Goal-Setting and Patience
One of the most valuable financial skills a child can learn is how to set and work toward a financial goal. A great way to encourage goal-setting is by helping children define a specific savings goal.
Instead of a vague idea like “saving money,” guide them to focus on something they really want, such as a new bike, a video game, or a special outing. Once they have a clear goal, break down the cost into smaller, manageable steps.
To keep kids motivated, consider using a visual progress tracker. A simple chart, sticker system, or even a jar with a label showing how much they’ve saved and how much they still need, can make the process more engaging.
5. Keep the System Consistent
A successful allowance system depends on consistency. Without clear rules and regular follow-through, children may become confused about expectations or lose motivation to manage their money responsibly.
The first step is establishing a regular schedule for distributing allowance. Whether it’s weekly or biweekly, keeping the timing predictable helps kids develop budgeting habits. If a child knows they will receive their allowance every Friday, they can plan their spending and saving accordingly.
Another important factor is avoiding the use of allowance as a punishment tool. While it may be tempting to take away allowance as a consequence for bad behavior, doing so can create negative associations with money. Instead of learning financial responsibility, children may see money as something that is arbitrarily given or taken away.
It’s also essential for parents to adjust the system as their child grows. A 5-year-old might receive a small allowance with minimal expectations, while a 10-year-old can handle a more structured system with savings goals and spending choices. As children become teenagers, they might take on greater financial responsibilities, such as managing their own clothing budget or saving for larger purchases.
Teach Your Kids About Finances at AZCCU
An allowance can be a powerful tool for teaching kids financial responsibility, but it requires structure, guidance, and consistency. By encouraging saving, smart spending, and goal-setting, parents can help their children build strong money management skills. Over time, these lessons will prepare kids to make responsible financial decisions in adulthood.
At Arizona Central Credit Union, we have tools to help you teach kids and teens financial literacy, along with savings opportunities specially designed for their needs. If you have any questions, contact us online or call (866) 264-6421.
