Kids at Work: The Humble Allowance As Teaching Tool

In the digital age, the idea of paying kids an allowance may seem antiquated and quaint. Even if not, allowances are a touchy subject, especially for well-off parents concerned about spoiling already privileged kids.

Even if you do want to try an allowance, questions abound: how much to give, when to start, how to talk about it – all which can end up in putting all this off. The gnawing feeling that you might be sending the wrong message, as in “free money!” also has lots to do with putting off allowances. However, allowances can be set up in all sorts of ways so that the money messages you want to pass on to your kids are reinforced instead of negated.

Usually, a good time to start paying an allowance is when the kids are in grade school. They are then learning the basics of math, usually welcome ways to get involved in family matters, and are receptive to your guidance. An allowance can be a good way to teach kids self-reliance in budgeting, saving, sharing and even investing.

Rest assured that you are NOT missing out if you decide not to pay an allowance. There are many other ways to teach kids about money. But if you do decide on an allowance, realize that the key is implementation and consistency. And also keep in mind that you don’t need to get it perfect on the first try. Fine-tuning and making adjustments based on the five questions below is to be expected as you figure out what works for your young people and you.

Good to know BEFORE starting an allowance:

  • WHY are we providing an allowance? (To teach kids how to manage money; to incentivize work, etc.)
  • WHAT do the kids need to do to get the allowance? (Nothing, specific ongoing chores, occasional help, etc.)
  • HOW MUCH should we give? (Too high and it’ll feel like an entitlement; too little, it’ll lose impact.)
  • WHEN will we give them the money? (Weekly, monthly, etc.)
  • HOW will we give them the money (Cash to make it more real or digitally?)

Answers to the above questions make it easier to decide which allowance structure works best for your situation. Here are the major options:

#1. The Unconditional Allowance
No work required or strings attached. Giving money unconditionally allows your child to learn how to manage money and practice this regularly. However, a no-strings-attached allowance doesn’t result in the good feeling of earning money for doing work. The positive is that when kids do chores, they are doing them out of duty, obligation and/or goodwill and not because they’re getting paid.

“Giving a child an allowance, particularly a regular, unconditional allowance that the child can depend upon, is a terrible idea.” That’s the researched opinion of Lewis Mandell, Professor of Finance and Managerial Economics and former Dean of Business at SUNY, Buffalo. Mandell reviewed 50 years of research from the U.S., Canada, Europe, and Australia on paying allowances. He found that teenagers who receive a regular unconditional allowance tend to view this as an entitlement.

#2. Earn Money for Chores
Kids “earn” money for doing chores and other tasks, either regularly or as needed. This is the most popular type of allowance and is solely rewards based. It is an exchange of services for money, similar to the concept of a job. Here, you’re helping kids see the satisfaction that comes with earning money. The downside is that you might feel like you’re paying the kids to do things they should be doing out of duty, obligation and/or goodwill.

You can modify the “earn money” allowance to encourage independent thinking and entrepreneurship. For instance, you could offer to pay your child something if he/she spots a problem around the house that needs fixing, proposes a fix and then does the fix. 

#3. Pay as Needed
The allowance is paid whenever children ask for help to pay for something they want. It can be paid in installments to help kids save up for something big, be it designer shoes or a smart phone. This type of allowance lays the groundwork for an ongoing money conversation between you and your child. It allows you to discuss and analyze the pros and cons of each request. Collaboration between you and your child develops. And it could also develop the child’s negotiation skills.

#4. The Hybrid
Here, you mix and match elements from the above approaches and make adjustments as the children get older or their needs change. For instance, you could start out paying an unconditional allowance when the kids are in first grade so they learn to fund their piggybank and basic budgeting (spend/save/share). Then you upgrade to a higher allowance based on the kids doing regular chores around the house.

In junior high, you supplement the allowance with extra money for clothes, electronics, etc. but only if they come to you with a budget and in exchange for doing chores. In high school, you can encourage them to get a part-time or summer job and suggest they may want to start investing a portion of their combined allowance and income.

Tax Considerations

Officially Hiring Your Own Children: This can work well for business-owning parents as well as the kids, but IRS rules apply. Note that as qualified employees, kids can fund their own Roth IRA accounts starting in high school.

Beware the Kiddie Tax: The IRS taxes children’s “unearned” income (income from investments such as capital gains, dividends, etc.) differently, via the “Kiddie Tax.” For 2024, a child’s unearned income up to $1,300 is tax-free; the $1,300 is taxed at the child’s tax rate; and amounts over $2,600 are taxed at the parent’s tax rate.

Allowances are essentially gifts. Each parent can give up to $18,000 total each year to any one recipient without triggering gift taxes.