Clearly, there is no one-size-fits-all amount, every family is different. In this blog, I’ll go through a useful framework to determine how much you should give to your kids as pocket money (or 'Allowance' for my readers in the US) for your family. A lot of this has been inspired by a conversation I had with Dennis Harhalakis. Dennis is an amazing money coach whom I have been doing ‘Lunchtime on LinkedIn’ talks with (alongside Fanny Snaith, another money coach). He has been using the framework set out below with his three boys. To help set the scene for the framework, let us consider an extreme case in terms of a child’s financial upbringing.
Extreme case: Parents pay for everything
Let’s imagine you have a child and you buy everything for them until they become an adult at 18. If they want new clothes, you give them money. If they want money to go to the cinema with their friends, you give them the money. If they want the latest iPhone, you give them money. Then, at 18 years old, they go out into the real world and you want them to be adults so you don’t give them any more money. You’ve done your job! This child would have no experience of how to earn or budget money. They probably want to maintain their high standard of living which is now well above their means. These factors are likely to lead to them to making a lot of money mistakes and overspending (debt).
Essentially, we want to use pocket money to avoid this scenario and make sure our kids are prepared when they become adults.
Pocket money framework
When kids are very young, you will clearly have to pay for everything for them. Snacks, toys, clothes, entertainment.
As they start to get older, pocket money can be a way of slowly transferring the responsibility of who pays for things from you to your kids.
By the time they become adults, you want them to be in control of managing their own discretionary spending.
Putting the framework into action
Essentially, you need to set out what things you are currently paying for and decide which of those discretionary expenses your kids are old enough to be responsible for. Then you give them pocket money at the start of each week (or month) and they pay for those expenses. For our girls, they are still young (8 and 6) so we give them some pocket money each week. We now don’t buy our kids toys, apart from on their birthday and at Christmas. If they want other toys they have to save up their pocket money to buy. We have a rough idea of how much the toys they might like cost and so we have set the pocket money to be enough that they could afford a new toy every 6-8 weeks if they saved up (after allowing for a bit of their pocket money to be saved for the long-term). As they get older and more independent, we’ll start giving them more pocket money and will no longer pay for certain things. If they decide to use their pocket money for other things or decide to spend it all in one go, that’s their choice. Essentially, the framework is to consider all the different things that you already spend money on for your kids and consider which ones you feel your kids are old enough to be responsible for. Then, rather than paying for these things directly, you give your kids the money as pocket money and they pay for these things. Here’s a list of some discretionary items I know a lot of parents spend money on for their kids:
Entertainment - cinema, bowling, ice-skating
Holiday spending money
Set a date each year to review the list and decide which items are newly expected to be paid for from pocket money.
It might be that one month they prefer more new clothes than going to the cinema, that’s fine. They have their money and can decide. Your role is to allow them to make mistakes and learn from these mistakes, i.e. don’t pay for these items when they overspend.
Clearly, the focus is on discretionary expenditure, rather than necessary expenses like school clothes.
Earning versus giving pocket money
In short, when kids are young, the focus of pocket money should be to form a good savings habit so giving them it allows them to achieve this without distractions. As they get older, they should learn about 'earning' money. It is then up to you (ideally as part of a conversation with your kids) to say which spending items you will finance via pocket money and which ones they should now have to pay for via earnings. For example, you might still want your kids to be able to pay for non-school clothes so they can opt to use their pocket money towards those, but you may want them to earn money to cover new gadgets. This will vary massively by family and the maturity level of your kids.
Stick to the agreement
Very important point: Once you set out the rules for spending, stick with them. For example, if you say that they have £20 per month for entertainment, and they spend it all in the first week, then you need to make sure you don’t give ‘one-off’ bonuses so they can go out the following week. I know this can be very hard but this is how they learn to budget.
If they get the impression that breaking their budget doesn’t have consequences, then that impression will stick and could lead to them using debt as they get older. If they want more, they have to earn more, just like in the real world. However, allow yourself to back down if money is having a negative on your relationship with your kids. What to read next? Should pocket money be linked to chores?
I hope you found this framework useful. Thanks for reading! Will
P.S., If you want your kids to be great at managing their pocket money, grab them a copy of my book, Grandpa's Fortune Fables (fun stories to teach kids about money)