How to start kids allowance

Our family history on kids allowance

When Holden turned five years old, he started to become obsessed with money. He would find coins on the sidewalks (dubbed “findery money”) with his eagle-eye finding skills and somehow convince his peers to part with their own coins. He returned home from his first ever slumber party with a heavier backpack that what we sent him. I looked in and saw a heap of quarters. His haul totaled $9.63. WTF, kid? Is it time to get this kid allowance?

Alec and I joked that we were the parents from Family Ties and he was our little Alex P. Keaton.

Kids are ready for allowance when they are interested in money. All the time!

Just like an interest in real food indicates a baby’s own readiness to eat solids, so we concluded that our child’sÂ fascination with money indicated his readiness for an allowance.

After some thinking and research, we decided to implement a spend-save-give system (as inspired by PhD in Parenting) to teach our greedy kid some charity and saving habits. We messed around with the formula a little bit and this is what felt right.

Our formulaÂ for kids’ allowance

We thought that $2.50 was appropriate for our 5 year-old based on $.50 per year of his age (and also because $5 seemed like too much). We determined a mandatory distribution of his weekly allowance for each category:

Give: $.25
Save: $.75
Spend: $1.50

I attempted to explain the concept behind each of the categories and he sort of understood.

This is where it gets complicated and I might lose some of you, but I’d love to hear your thoughts on our strategy.

We offered to “match” his funds whenever he contributed extra to Saving and Giving. He didn’t take the bait. No biggie, we thought, he’s only five.

I make all denominations of coins available in Bank of Mom to accommodate weekly negotiations over how much goes in each category.

Holden showed some brilliance for money-management right from the get-go. He asked, “if I Give my friend Nathan money and he gives it back, can I put it in Spend?”

Nice one. The answer is no.

Changing our plan of attack
The most significant switcheroo to the allowance plan vs. the allowance implementation happened around the Save money. I originally conceived of this as money he could never touch. Money that would go to college or a car or something painfully far in the future. About a month or so into the allowance, Alec and I discussed changing the Save to be for something big and great but not soooo big and great he’d never get it. What about a minimum savings goal instead? Sure, why not. How about $100? Sure, great. And after that, we could raise it to like $250. Super.

We were both surprised at the change that took place in our little saver.

Having never shown interest in the matching opportunity, he suddenly changed his tune. He nearly doubled his allowance each and every week for months because of this new incentive structure. Just by splitting his $1.50 between the other pots of money, he turned his $2.50 allowance into $4 each week. Very clever, kid.

Holden reached his $100 savings target in about seven months. He saved enough for a giant Lego set.

$100 Lego airport, earned over 7 months, built in 1 day

As for the Give portion, he has donated money to his public school’s fundraiser and food drives. Recently, he cleared out the cash to buy $25 in preschool raffle tickets toward an iPad2.

This is how we do it
We keep track of week-by-week paydays in an old checkbook register. Here’s the brand of “spend/save/give” bank we bought. I like that it keeps the categories separate.