Allowance

What Is Allowance?

An allowance is a regular sum of money given, typically by parents to children, for discretionary use. It serves as a practical tool within personal finance to teach children fundamental money management skills. By providing a fixed amount of money, an allowance empowers children to make decisions about saving and spending, thereby fostering early financial literacy. This consistent financial exposure helps children understand the value of money and the consequences of their financial choices. The concept of an allowance is widely recognized as a foundational step in developing healthy financial habits from a young age.

History and Origin

The practice of providing children with an allowance evolved as societies became more complex and the concept of childhood itself transformed. While informal giving of money has likely existed for centuries, the modern allowance, structured as a regular payment for financial education, gained prominence in the 19th and 20th centuries. This period saw increased recognition of children's need for practical skills to navigate an increasingly commercial world. Institutions and experts began to advocate for systematic methods to instill financial responsibility. For instance, in more recent times, organizations like the Consumer Financial Protection Bureau (CFPB) have developed resources such as their "Money as You Grow" initiative, providing age-appropriate financial lessons and activities for children, underscoring the ongoing emphasis on early financial education.⁴

Key Takeaways

• An allowance provides children with practical experience in managing a fixed amount of money.
• It serves as a teaching tool for basic financial concepts like budgeting, saving, and spending.
• The frequency and amount of an allowance can be adapted to a child's age and evolving financial understanding.
• An allowance can help cultivate important financial habits, such as setting goals and making trade-offs.
• Its effectiveness is often tied to accompanying conversations and guidance from parents or guardians.

Interpreting the Allowance

The interpretation and application of an allowance largely depend on the specific goals parents or educators set for it. For younger children, an allowance might simply be a means to introduce the concept of having their own money and making choices, perhaps distinguishing between "needs" and "wants." As children mature, an allowance can become a more sophisticated tool for teaching budgeting and accountability. It can be interpreted as their personal discretionary income, which they are responsible for allocating. The effectiveness lies not just in the money itself, but in the discussions and lessons that accompany it, guiding children to understand the broader implications of their money management decisions.

Hypothetical Example

Consider Maya, an 8-year-old, who receives a $5 weekly allowance. Her parents encourage her to divide her allowance into three jars: one for spending, one for saving, and one for giving to charity.

In a given week, Maya receives her $5.

• She puts $2 into her "spending" jar, aiming to buy a new toy.
• She puts $2 into her "saving" jar, contributing to a larger goal of buying a bike.
• She puts $1 into her "giving" jar for a local animal shelter.

After several weeks, Maya has accumulated $10 in her "spending" jar and decides to buy a small book. In her "saving" jar, she has $30. Her parents explain how her savings can grow faster if she puts it into an account that earns compound interest. This simple scenario demonstrates how an allowance provides a tangible way for Maya to practice allocating funds, delaying gratification for larger financial goals, and understanding the principles of financial allocation.

Practical Applications

An allowance has significant practical applications primarily in childhood financial education and broader financial planning. It provides a controlled environment for children to learn about cash flow, decision-making, and the value of work (if tied to chores). This hands-on experience is crucial for developing financial education from an early age. The Consumer Financial Protection Bureau (CFPB) emphasizes that children learn financial behaviors by observing adults, and hands-on experience is the best teacher for financial capability.³ For example, resources like the Investor.gov savings goal calculator can be used to help children visualize how their allowance, if saved consistently, can grow towards specific financial goals.²

Limitations and Criticisms

While generally viewed as beneficial, the concept of an allowance also has limitations and faces certain criticisms. One common debate centers on whether an allowance should be unconditional or tied to chores. Tying it to chores can teach responsibility and the concept of earning, but some argue it might undermine intrinsic motivation or make children associate all household contributions with monetary reward. Another limitation is that an allowance, particularly if it's a small amount, may not adequately prepare children for larger financial complexities such as managing debt or making significant investment decisions later in life.

Furthermore, research on the impact of financial resources on child outcomes suggests that while increased household income can positively affect educational achievements and other well-being measures, the specific mechanism and long-term effects of an allowance can vary based on family income and how the allowance is structured.¹ If not accompanied by robust financial literacy discussions, an allowance alone might not fully equip individuals for true financial independence in adulthood.

Allowance vs. Pocket Money

While the terms "allowance" and "pocket money" are often used interchangeably, there can be subtle differences in common usage. "Allowance" typically implies a more structured, regular payment, often with an implicit or explicit understanding that it's for learning money management or covering certain personal expenses. It suggests a more deliberate act of financial training. "Pocket money," on the other hand, can be a more informal or sporadic sum given to a child, simply for small, immediate purchases, without necessarily the same emphasis on structured financial habits or broader financial education. Both provide children with spending power, but an allowance usually carries a stronger pedagogical intent.

FAQs

How much allowance should I give?

The appropriate amount for an allowance varies greatly depending on the child's age, family income, and what expenses the allowance is intended to cover. It's often recommended to start small and increase the amount as the child matures and takes on more financial responsibility. The key is that the amount is meaningful enough for the child to practice saving and spending decisions.

Should allowance be tied to chores?

This is a common question with differing views. Tying an allowance to chores can teach the concept of earning money through work and responsibility. Alternatively, some parents prefer to separate chores (as contributions to the family) from allowance (as a tool for financial education). Both approaches have merits, and the best choice often depends on individual family values and goals.

What should children learn from an allowance?

Children should learn fundamental financial literacy concepts such as budgeting, the difference between needs and wants, delayed gratification, the value of saving, and making responsible spending choices. It also introduces them to the idea of a limited cash flow and the trade-offs involved in financial decisions.