As my oldest approached 8 years old, I started to consider the idea of giving him an allowance. I did some research and found a wide range of approaches, all with various advantages and disadvantages. Some recommend tying an allowance to completion of chores, while others recommend a fixed allowance. Most recommend an amount based on age between $0.50 and $1.00 per year. I settled on a fixed $5 per week independent of chores; although I do expect him to help out around the house. While tying allowance to chores may teach work ethic and consequences to some degree, I wanted to focus more on learning how to handle money. I want him to have a consistent income so he can learn how to manage and plan for the future while balancing short-term desires and long-term goals. I’m also trying to throw in some lessons about taxes, compound interest, and charity. We’ve been going for about a year and a half now and it’s worked out pretty well. Here is how I decided to structure the $5 weekly allowance:

Spend – $2

This can be used for whatever he wants, within reason. Since he’s only 9, we still maintain a veto on all spending; although I expect to ease up on this a bit as he gets older. This pool of money gives him some good experience balancing immediate desires with his short-term savings goals. For instance, if he decides to spend $2 on a snack while we’re out, he’s going to have to wait an extra week for the toy he’s been saving for. I impose an income tax of 10%, paid back to me when he gets his allowance. It doesn’t seem to have much of an impact at this point. I’ve been thinking about doing something to make it more impactful – maybe have him pay it quarterly or annually, or raise the rate. Right now it only applies to the allowance, but I may consider applying to all income at some point in the future.

Save – $2 

This is intended to be for big stuff, although big is relative at this age. Someday he might want to save for a car or something, but for now he’s mostly interested in big Lego sets. I think it’s good for him to delay gratification and have to really save up for something he wants. For now, I hold the money in the “Bank of Dad” and pay a ridiculous interest rate of 12% (1% paid at the end of each month). As the balance grows this could get expensive, but I plan to switch over to some sort of real investment in the future. This could serve as an introduction to the stock market (low cost index funds of course) or other investment options.  

Give – $1

This gets saved up and donated to the cause of his choice. When he’s saved up a good amount, we sit down together and decide where it goes. I match 100%, so his giving has twice the impact.  

I expect this plan to evolve over time as we see how it works, especially when our younger two are added to the payroll. A next step may be differentiating between needs and wants – we pay for the needs (e.g. food, basic clothing) and he pays for the wants (e.g. toys, fancier clothes). It could also involve giving him control over some of the money we budget for him. For example, we could give him the money we plan to spend on his clothes for the year and let him handle the spending. He would need to budget the money to make it last the year and decide if it’s worth using his own money to supplement our funds. Ultimately, the goal is for him to be able to responsibly manage all his own expenses by the time he turns 18, so he starts off on a solid financial path.

I developed my allowance plan from many sources, but one of the most significant was The Opposite of Spoiled by Ron Lieber. Below I’ve provided a link for this and a couple other books about kids and money. And if you have thoughts or experiences with allowance, please leave a comment.