Allowance for Kids: A Simple System to Teach Saving, Spending, and Investing

The carnival was in town, and my son and daughter had come down from the post-ride adrenaline rushes hungry for a sugar-packed treat.

If I agreed, it would lead to a late night and probably at least one meltdown. But it was a once-a-year event, and (at the time) I saw the ultra-processed, artery clogging junk food as an essential part of the experience.

I pulled a twenty-dollar bill out of my wallet before I realized they’d reached an impasse. Nicole preferred lemon shake-ups, whereas James was a fan of the funnel cake. Unfortunately, the booths were in opposite directions. As the argument heated up, I held the bill up, gripping it at the top in the middle, as though I was about to rip it. That got their attention.

“WAIT! STOP! We can work it out!” They cried in unison.

Suddenly, they were both completely calm, and more than willing to let the other go first. Was this the best lesson… perhaps not, but it did leave a lasting impression.

I, like many parents, was torn about the best way to teach my children financial responsibility. Truth be told, I didn’t feel like an expert on the subject myself. It turns out, there was a better way (financially and nutritionally)…

Parents (often adamantly) disagree on whether kids should receive an allowance. Given that, it isn’t surprising there’s no consensus on what age to start, how much to give, or if strings should be attached.

Instead of seeing allowance as just payment for services rendered, or providing pocket money, think of it as an opportunity to increase financial literacy, encourage delayed gratification, and develop money management skills.

When children handle money early, they gain an understanding of the value of a dollar and learn to identify and rank financial priorities.

The skills they acquire will benefit them throughout life.

Allowances can be used to:

Introduce financial concepts and debunk money myths
Teach patience, critical thinking, and delayed gratification
Lay the foundation for sound saving and spending habits
Encourage long-term planning, generosity, and a healthy money mindset

That would be wonderful! But the details are still muddy:

Should your child only receive money when the chores are completed and homework is finished?
Will it be paid in cash or deposited into a bank account?
Do they get their allowance when they’re grounded? What if they receive a bad grade?
How much is enough? How much is too much?
Will there be rules about how the money is spent?
Do they have bills to pay? What, if anything, will they have to budget for?

Don’t worry, I have answers!

Let’s dig in…

The Basics: Save, Spend, Give, Invest

One of the most common approaches to allowance has kids divide cash into three jars (or accounts): spending, saving, and giving. This system can make money management tangible at a young age. Its strength lies in its ability to introduce multiple financial lessons simultaneously.

The Save for Later jar demonstrates the power of delayed gratification. Children learn that the best things come to those who are willing to wait. This is where they’ll develop the crucial “save first, spend later” habit. Kids may start setting lofty goals once they realize they can have more expensive items as long as they’re willing to wait until sometime in the future.

Always start with the Save for Later jar! This lets children know how important it is to Pay Yourself First. I strongly suggest you have them save at least 20% of their allowance, and any other money they receive, to spend at a later date.

The Spend Now jar teaches kids to budget. After they take care of any financial obligations, kids shouldn’t have quite enough left for everything they desire. In addition to having to make difficult choices between competing wants, this jar will let them experience, firsthand, the consequences of impulsive decisions.

Although it’s not advisable to link allowance with disciplinary action – keep paying whether or not they’re in trouble – restricting immediate spending during punishment is a good idea.

Give jars are used to encourage empathy. They let parents turn generosity, a vague and abstract concept, into something concrete. If you choose to have a give jar, you may want to let them know they can help others by offering money, time, or both.

In addition to the classic “save, spend, give” open an Investment Account to show kids how to build wealth. They’ll realize money, when invested wisely, grows over time.

Children might not grasp compound interest until they witness it.

If you keep it simple, kids can learn to invest at 7 or 8. Don’t worry, there’ll be plenty of time to explain the complexity of offerings and nuances of the market when they’re older.

Try this:

Open a custodial investment account.
Encourage investment by offering to match what they contribute. For every $1 they set aside to invest, you’ll put $2 into their account.

Starting early with investing not only builds knowledge, normalizes the habit, and encourages planning for the future, it provides an essential investment ingredient – time!

Financial Goal Setting for Kids

Help your child understand that patience and planning pay off.

Encourage tiered goals:

Short-Term (weeks): a toy, movie, or birthday gift for a friend
Mid-Term (months): the latest tech, shoes, a bike, a trip to a museum or amusement park, a season pass to the pool
Long-Term (years): car, college, financial independence

By tying allowance to personal goals, kids start becoming more strategic with their money. They learn to use money as a tool, prioritize what matters most, and align their spending with their values – lessons that will last a lifetime!

Use Real-Life Money Lessons

One of the most valuable aspects of giving kids an allowance is that it lets them make low-cost, high impact mistakes while you’re around to guide them.

When they spend impulsively, they’ll learn they have to miss out on other options and opportunities. If middle schoolers spend on frills before bills, they may not be able to use their cell phone for a week or two. A seventeen-year-old may have to walk or ride the bus to school if they didn’t add gas money to the budget.

When I was young, my parents gave me a credit card with my clothing money for the year. Later that day, I blew it at the mall. That winter, when I couldn’t afford gloves and a hat, I could quite literally feel the consequences of my lousy decision.

These moments teach kids to:

balance wants and needs
evaluate before acting
compare options before buying
become aware of tradeoffs
bounce back after financial missteps

Introduce Financial Concepts and Products

There are people pushing to have finance taught in every school. But, until that day arrives, allowance may be one of the best ways to teach children about everything from bank accounts and budgeting to student loans and inflation.

Ensure that when your kids enter adulthood, they understand:

Deposits and withdrawals
How to read a paycheck
Salary negotiation
Filing taxes
Cash flow (and how to track it)
How to calculate net worth
Interest, dividends
Various investment accounts
True cost, depreciation
Debt, amortization
Sound investment, market cycles

Keep increasing their knowledge. Going from cash to digital payments into a high yield savings or money market account, as they get older, adds to the foundation of their future financial independence!

Encourage Thoughtful Spending

Rather than simply giving out money, encourage kids to think through purchases:

Ask: “Are you sure you really want this?”, “Do you think it’s worth the money?”, or “Do you think the price might come down later?”
Teach your child to compare brands and similar products
Help them assess value, durability, and quality
Talk about “joy per dollar” and spending on experiences over things
Encourage them to use money to express their uniqueness, rather than what’s trendy

Let your kids see how you think about spending, approach allocation, and achieve financial goals. Demonstrate money mindfulness, intentional wealth building, and striking a balance between life in the present and plans for the future.

Giving children an allowance isn’t just handing out money –
it’s about providing a structured opportunity to practice fiscal responsibility
and engage in long-term planning.

The earlier kids learn these lessons, the more confident and capable they’ll be with money later in life.

Start today! Then watch as your children gain skills and learn valuable lessons that will serve them for the rest of their lives.

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