How to Save Money by Giving Your Child an Allowance

How to Save Money by Giving Your Child an Allowance

“Huh?” you say, “Won’t handing out allowance money to my child only increase my family’s spending?” No, not if you treat an allowance as a budget instead of a handout.

Here’s how it works:

Step 1: Give your child some purchasing responsibilities

Make your child responsible for some subset of his or her spending. Pick something your child really cares about. For young kids, this might be as simple as small treats or modest knickknacks. For example, my eight year old likes the occasional pack of gum as well as orange tic-tacs. For older kids, you might put them in charge of purchasing related to their entertainment, online games, sports, or hobbies. My  oldest son is a drummer. He’s in charge of his drumming related  purchases – which can definitely add up! I also like to put my teenagers in charge of purchasing their own clothes.

Step 2: Work out a budget and matching allowance

Once you’ve identified what your child is responsible for purchasing, work out a budget using sample items to calibrate the total amount. For the young ones, maybe it’s the rough equivalent of one pack of gum a week plus one Matchbox car a month. For my teenagers, I have them make a list of the essential clothing items they think they’ll need, tally it all up, and submit it to me and my wife for review and approval. (If you want to be harsh and simulate what goes on in the corporate world, just arbitrarily slash their budget in half like my old boss used to do! OK, I’m only half kidding…) Do whatever works for your family, your values, and your current financial situation.

AllowanceWith budget in hand, set an allowance to match it. Note that it’s often handy to have separate allowances that are delivered in different time-frames. For example, I like to deliver each teenager’s clothing allowance annually. That way, they get the experience of managing – or mismanaging – a relatively large chunk of money over a long period of time. That’s an important skill to master. If they run out of clothing funds, they either have to go without for the rest of the year, or make additional clothing purchases from their weekly general spending allowance. If they choose the latter, it means foregoing movies and other social activities for a while. The more they work through these types of trade-offs, the better. Of course, the important lesson is: you can’t have it all.

The nice thing about this disciplined budget-based approach is that you won’t feel swayed by what other families are doing. Your allowance amounts aren’t arbitrary, variable, or emotional. They have a clear explanation backed up by a practical budget and a clear set of expectations.

Step 3: Track the balance and get out of the way

With responsibilities, a budget, and an allowance in place, your job is primarily to get out of the way. It’s their money and their responsibility to make the decisions – as long as they keep their balance above zero. Of course, if my eight year old announces that he wants to buy cigarettes instead of tic-tacs with his money, I’ll step in. Obviously, you have the power of veto when a purchase defies your family’s values or poses health hazards. But use your veto power sparingly and only when really warranted. Otherwise, let them practice making their own decisions. Let them make mistakes and deal with the consequences (like blowing the budget on a wear-it-once dress only to ride out the rest of the year in T-Shirts).

You’ll often find that kids grossly underestimate what their budget should be. That’s OK. It’s all part of the learning experience. Rather than correct it right away, I’d advise letting them run with the lean budget so they can discover the mistake on their own. If they’re falling short due to poor purchasing choices, gently coach them on how to be more cost conscious: Do you really need designer jeans? Will you really wear those more than once? What about EBay? If their purchases are reasonable and they just underestimated their needs, allow them to renegotiate the budget when appropriate. Just don’t let that become a habit.

So, how does this save us money?

The budget-based allowance approach saves money the way all good budgets do: by putting constraints on spending and slowing down purchasing decisions. An essential element of the plan is ownership. You’ll be amazed at how frugal kids can be when it comes to spending their own money. Spending Mom and Dad’s money? That’s easy! Spending their own money? Not so fast!

You’ll also notice another pleasant side effect of this approach: it reduces family tension. Putting your child in charge with a budget eliminates the all-too-common whining and arguments around purchases. The point of purchase changes from extended begging (“Mom, can I have that? Why won’t you buy it for me? Pleeeeaase!!! Whaaaaahhhh!”) to a largely emotion-free assessment of the current balance (“Hmmm – do I have enough to  buy this?”).

Saving money and saving nerves: now that’s what I like to call a “twofer”.

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  2. Betty Curran says:

    I’ve read some suggestions of gradually increasing the allowance until all the normal expenses such as clothing and entertainment are covered by the allowance and it’s up to the child to determine how to use it. By that time the child is in mid to late teens and will soon be independent and this seems like a great way to teach them how to manage their money. Starting out when they are very young lets them learn step by step.


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