As the calendar flips to a fresh year, it's the perfect time to introduce new habits—especially ones that teach your kids valuable life skills. If your children are starting to show interest in earning their own money, consider using this opportunity to set up an allowance system. Not only does it give them a sense of responsibility, but it also helps them build essential money management skills in a fun and practical way.
 

6 Steps to Setting an Allowance

In today’s day and age, setting an allowance for your kids seems like an ancient tool. Many economists, however, encourage parents to set up an allowance for their kids early in life so they can learn how to manage their money and make mistakes when they’re young rather than later in their life.
  1. Create a plan — No one has more questions than a child. To help your child clearly understand their allowance, think about why you want your child to have one, what they must do to receive it, the expenses they are expected to cover and how often they receive it.
  2. Establish an amount — Try the age-based approach to avoid conflict and comparison if you have multiple children. The age-based approach gives them the same amount of money as their age. For example, if your child is 12, their allowance is $12. Ultimately, it depends on the family and their budget, so set an amount that makes the most sense for your family.
  3. Designate a pay day — Make a note on your calendar for giving your kids their allowance and note the expected age-appropriate tasks you have set for your child during the week, so they are held accountable with their end of the deal. Staying consistent will build trust between you and your kids. As parents, keep your end of the bargain by paying the designated amount on the specific “pay day.”
  4. Implement the three S’s (Spending, Sharing and Saving) — To help your kids learn money management, have them split their allowance into three categories — spending, sharing and saving. For example, suppose you are paying your child $15 a week. In that case, they can put $5 toward the spending category for something they would like to buy, $5 into sharing such as donating it and, lastly, $5 into the savings category if they want to save up for an expensive gaming console or other high-ticket item. Some families use a set of three jars or a set of three envelopes for dividing the money. Putting their money into these categories will help them see money is only sometimes meant to be spent and will help them understand how to manage their bank accounts when they are adults.
  5. Allow them to make mistakes — As much as you want the best outcomes for your kids, there is no learning without failure. For your kids to learn money management, let them be independent with their allowance and have them spend and save on their own even if this deviates from the agreed upon “3 S’s” plan. Learning these lessons early on will help them in the future when they are making bigger purchases. Spending too much of their money on candy is a better lesson to be taught now than when they are older and spend too much on a car.
  6. Avoid making it a punishment tool — Do not take away their allowance as a form of punishment. Taking away their allowance can damage trust between you and your child because it shows them you are not holding up your end of the deal. Instead, find another appropriate punishment, such as limiting how often they can see their friends or limiting their screen time.
This information is provided in partnership with the Iowa Bankers Association and Iowa State Bank.