Giving your child an allowance serves many purposes. Besides letting them finance their needs, it teaches children about financial management early on.
If your child is ready for an allowance, there are several important considerations to make before they receive it. This guide to allowance for kids will outline them and answer the most common questions parents have:
- What is an allowance, and why should your child get one?
- How much allowance should you give?
- What is the best way to give an allowance?
What Is an Allowance for Kids?
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This question might seem superfluous at first glance, but there isn’t a consensus on a specific definition of an allowance. In a broad context, it’s an amount of money your child receives on a predetermined basis, typically once a week.
Still, there’s a lot of debate on whether an allowance is something a child should receive by default or a form of payment they get for chores.
Many parents believe their child should earn an allowance to understand the value of hard work. While there’s certainly a strong logic behind this, research shows rewards might not be the best way to motivate children. Besides, a chore-based allowance may lead to the child expecting a payment each time you ask them to do something.
There’s no correct answer to whether your child should get an allowance as a reward or without any chores—this mainly depends on your parenting style. Regardless of the motivation behind the allowance, your child can benefit greatly from it.
Why Should Kids Get an Allowance?
There are two main arguments in favor of giving your child an allowance:
- Increased independence and decision-making skills
- Better financial literacy
When your child receives an allowance regularly, they can manage their own money instead of having to ask you for every purchase they want to make. This is an excellent step toward independence, and it teaches your child to be responsible with money.
An allowance will likely be your child’s first opportunity to learn about saving, budgeting, and numerous concepts they’ll need throughout adulthood. They can learn to make sensible decisions instead of falling into the trap of instant gratification.
Such first-hand experience with money will also improve your child’s financial awareness and literacy. This is a significant benefit because your child may not have any other source of financial education. A nationwide survey grading each state’s ability to ensure financial literacy in high school graduates showed that only five states got an A:
There are numerous ways to teach your child about money, but theoretical knowledge might not be enough. An allowance lets children apply what they’ve learned and build healthy spending habits early in life.
How Much Allowance Should You Give Your Child?
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The allowance amount depends on several factors, most notably:
- Your financial situation
- The child’s age
- Their weekly needs
The allowance amount increases with age, which makes sense because your child’s needs grow with time. A common rule of thumb parents rely on to calculate the allowance is $1 per child’s age, so you can use this as a starting point.
Tips for Giving Your Child an Allowance
After deciding how much allowance you want to give your child, it’s time to see how you’ll approach it. To maximize your child’s financial and educational benefits, take the following steps:
- Choose between cash and cards
- Set spending rules
- Encourage saving
Decide How You’ll Give the Allowance
Cash allowance seems like a go-to option, especially if your child is young and you won’t give them a significant sum. As they grow, you might want to consider switching to a prepaid or debit card.
When your child is eligible for a checking account, you can open one for them and get them a debit card. If you want to start with cards sooner, a prepaid card can be an excellent choice. You can load the card each week with the agreed-upon amount, and your child can use it for payments and withdrawals.
Define Allowed Purchases
While the point of an allowance is to give your child more independence, you should still set some rules—at least in the beginning. They should learn the difference between justifiable purchases and unnecessary luxuries that hurt their budget.
It’s important to closely monitor your child’s spending behavior when they first get an allowance. If you notice a tendency to spend it all at once or other red flags, teach them how to budget properly.
Help Your Child Save Up
Long-term thinking is a crucial aspect of financial stability. It’s natural for a child to be impulsive and impatient while they’re young, but take the allowance as an opportunity to ensure they don’t carry these traits into adulthood.
You can simulate the savings benefits offered by many banks and reward your child for being frugal. For instance, you can give them a small bonus at the end of the month if they meet the savings goal they’ve set.
Other Ways To Support Your Child’s Financial Independence
As your child grows up, their allowance will be replaced by their wage or salary. At this point, they’ll enter the banking system and might seek financial products like loans and credit cards. By the time this happens, they should’ve already developed the money management skills that will keep them in good standing with lenders.
Besides teaching them healthy spending behavior, you can support your child by helping them build credit. A strong credit profile can be an invaluable asset, so the sooner you start, the better.
Some parents add children as authorized users of their credit cards to help them build credit early. This is because the CARD Act of 2009 doesn’t allow anyone under 21 to own a card unless they demonstrate the ability to repay the debt independently or have an eligible co-signer.
While your child does get a credit profile as an authorized user, this is a risky method for several reasons:
- They inherit your credit history and can damage your credit profile with poor spending habits, as your credit profiles will be connected
- You need to give your child access to the card, which can lead to significant debt because many issuers don’t let you set a limit on authorized users’ spending
- The child only builds credit while they’re an authorized user. When you remove them from the card, they need to start over because all your credit history gets deleted from their report
Luckily, there’s a better way to make your child’s adulthood easier—FreeKick.
Improve Your Child’s Creditworthiness With FreeKick
Created by Austin Capital Bank, FreeKick helps parents establish and build their children’s credit profiles. It’s a combination of a Federal Deposit Insurance Corporation (FDIC)-insured deposit account and hands-off credit building and monitoring services.
You don’t need to deal with another monthly subscription—FreeKick offers a free plan and two options with low annual fees based on the deposit amount:
- Free—One-time deposit of $2,500
- $49/year—One-time deposit of $1,750
- $99/year—One-time deposit of $1,000
If your child is between 14 and 25 years old, you can build their credit with FreeKick in three quick steps, as explained in the following table:
|Create an Account||When you go to FreeKick.bank, you can select the plan that suits you and open the account|
|Set It and Forget It||FreeKick automatically builds 12 months of credit history for your child and reports it to credit bureaus if they’re a legal adult (18 and over in most states). If they’re a minor, reporting will start as soon as they become an adult and activate it through a simple process|
|Keep Growing||After the 12-month term ends, you can renew the account for another term or close it and get 100% of your deposit back|
You can close your FreeKick account at any point without penalties. Note that if you do it while your child is still a minor, no credit history can be reported for the account because of the aforementioned restrictions.
Monitor Your Child’s Credit Profile With FreeKick’s Services (Coming Soon)
While building your child’s credit, FreeKick will also monitor their credit profile. This way, you can rest assured there are no errors or red flags that might damage their creditworthiness.
Monitoring is also an excellent way to ensure your child’s credit profile is heading in the right direction, as it allows you to proactively deal with any issues.
Most importantly, it reduces the risk of synthetic identity fraud—a serious crime targeting children. The perpetrator steals the child’s Social Security number (SSN) and uses it to create a fake identity, obtaining loans in the child’s name.
This crime can have severe consequences, but FreeKick helps prevent it through various security measures. The Social Security Number monitoring service stays on the lookout for signs of identity fraud by tracking names, aliases, and addresses associated with your child’s SSN.
FreeKick also monitors internet activity related to the trading of personal information, reducing the chances of someone obtaining the child’s information on the Dark Web. For added security, it also tracks all sex offenders in your area to alert you if any register under a different name using your address.
If your child’s identity is in jeopardy, FreeKick will appoint a certified restoration specialist to work on their behalf to restore it. Ancillary restoration costs are covered by a $1 million insurance.
Young adults are eligible for additional services:
- Lost wallet protection
- Change of address monitoring
- Payday loan monitoring
- Court records monitoring
To set your child up for stable adulthood and help them build credit safely, sign up for FreeKick.
Featured image source: Karolina Grabowska