The Importance of an Allowance

Apr 19, 2007 by

This post is intended for the readers in the audience who are parents. I’m not currently a parent, and most of my Facebook readers aren’t either, but this information might some day be useful.

Why give an allowance?

The value of giving children an allowance is that it introduces them to the concept of a budget. Consumption in the real world is constrained by a budget constraint. While many of the purchases desired by children can be afforded by their parents, there is value in forcing children to prioritize their desires and to fit them within a defined budget.

Forms of Allowance

Allowances can be open-ended, but they can also be directed subsidies. Parents that are concerned that their children will improperly allocate their funds can give their children categorized subsidies. For instance, children can be given a budget for clothing and for weekend entertainment. Although doing this prevents substitution of one type of good for another, it may be useful for children who are prone to substitute to an irrational degree.

Disbursement Patterns

Allowances can be paid on a periodic basis (weekly, monthly, quarterly, etc.) However, there are also other rational means in which to pay them. By giving small, evenly-sized disbursements on a frequent basis, and giving larger disbursements on a less frequent basis, children can be encouraged to use their allowance to make large as well as small purchases. For instance, a child could be given $2.50 every week, and $25 every ten weeks. While this would be an equivalent sum to receiving $5 each week, it might motivate different consumption patterns.

How much is the right amount?

The size of an allowance should be based on the expected cost of the items you expect the child to purchase using the allowance. If, before giving the child the allowance, you paid $20 per month for the child’s incidental expenses, $20 per month would be a reasonable allowance. If you are giving a clothing allowance and expect it to cover the purchase of shoes, the allowance will not be functional unless it is sufficient to cover the purchase cost of shoes. If you give too little, you may be tempted to supplement the allowance, sending the child mixed messages about budgeting. If you give too much or the child budgets well, the child will have excess capital. It is very important to not penalize a child for achieving some savings. When parents confiscate the portion of the allowance not spent during a period, as it was “unneeded,” they are in effect teaching their children to consume all of their income, lest it be confiscated. As the goal of an allowance is to teach savings and budgeting, not allowing children to accumulate a savings from their allowance goes against this goal.

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  1. Andre

    Good tips for mother and fathers that have children. Very good post.
    Just to say, I think that the it’s a good age to start giving allowance is ten years. At this age the child start to think more on how to achieve their goals.


  2. cpress

    An informative post. Parents need all the help they can get in raising their children in today’s world.

    I believe that the child’s age and activities have a lot to do with how much an allowance is given. If the child is very young, not much is needed. As they grow older, say attending high school, more is needed for activites, clothing, etc. Also is the child a female or male. Females need makeup money as males do not. All these are also considerations.

  3. As I wrote in the article, “The size of an allowance should be based on the expected cost of the items you expect the child to purchase using the allowance.” If you expect an older child to purchase more than a younger child with the allowance, it makes sense to give the older child more money. Likewise, if makeup is to be purchased, one must factor in the cost of makeup.

  4. cwm

    While I agree that giving a child an allowance will teach them the value of that money, I also feel that the child will learn more if he has to earn the money doing a specific chore. I am not in favor of providing a child money just because it is the 2nd tuesday in the month. One thing I have tried to teach my children is that if there is something that they want to purchase, they need to come to me with their plans to earn the money. I will even offer ideas. I believe they learn even more about the value of money when the have to work to earn it. When they reflect on what they had to do to get the money, maybe they won’t be so free to spend it!

  5. Andrew

    It all depends on the age. Yes it is age discrimination but whose to tell right from wrong. A child should earn a different amount of money than a teenager. At the same time though, the parents have to be a little more frugal with youngsters versus the older ones. Teach the older ones it is up to them to save for themselves and their future.

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