Updated on 03.19.12

Segment Their Allowance (79/365)

Trent Hamm

Each week, my children receive a small allowance. It’s not tied to any chores; instead, it’s mostly a tool to teach them about money management.

We pay them in quarters, with each child receiving twice the number of quarters as their age. So, a five year old would receive ten quarters, a three year old would receive six quarters, and so on.

When each child has turned four, we’ve started having them segment their allowance into four different groupings. At a minimum, they’re required to put one quarter in each of the four segments (after age eight, two quarters is the minimum).

Segment Their Allowance (79/365)

The four segments are spending, saving, investing, and giving.

The spending segment is just like it sounds: they can spend it on whatever they like, within reason. This money goes for short term wants like trading cards or other such things.

The saving segment involves them picking a specific savings goal, then putting aside their money in that segment until they have enough to buy it (usually along with money in the “spending” segment). This usually ends up being savings for a larger toy, like a Nintendo DS.

The investing portion is a long-term savings that won’t be touched until they’re at least sixteen, but with it they get to see the power of long-term saving and compound interest. So far, we’re just letting this segment build and talking about how much is in there, but eventually we’ll put it in a bank and perhaps invest it in other things.

The giving portion is just that: it’s given to a charity of their choosing once a year or so. We like to focus on charities where they can, in some direct way, see the good their money is doing, but they have the final decision about what charity to aid. We usually present several options to them, talk about each one, and they choose one.

We’ve been using the Money Savvy Pig for this separation (it made for a wonderful fourth birthday gift for our oldest and our middle child), but you can certainly replicate this scheme with four jars. You can also make up your own divisions and assign your own rules to it – whatever works for you.

The reason behind giving an allowance and segmenting is because, in the end, this is a budget. Segmenting an allowance means budgeting. They’re learning that when their income comes in, there are good reasons to split it up and to save some of it for the future. You should spend less than you earn in any given week, because if you do that, you’ll have money for other things later on.

This technique lets children see personal finance at work in a very tangible way in their own lives, which is the best way to make it real for them. There’s no abstraction at all. They feel the physical quarters, they see them in the jars, they get to make the choices as to how to spend them, they see the benefits of those choices.

Not only that, it gives you (as a family) an opportunity every week to talk a little bit about good personal finance practices, and that little chat can often be just as much of a motivator toward good behavior for the parents as it is for the children.

This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere. Images courtesy of Brittany Lynne Photography, the proprietor of which is my “photography intern” for this project.

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  1. Tammy says:

    I like this idea a lot. I might use different divisions, like one for college, but the overall idea is sound.

  2. Kai says:

    I know some people don’t like the control here, but I think this is an excellent idea. Sure, it doesn’t stop an older child from being annoyed, or a yougn adult from going wild with their first paycheque, but I think making saving and giving a habit from a young age makes it likely that they will consider these to be norms as they get older, and have a good basis.
    My parents didn’t talk to me much about money as a child, which i think was an oversight, but as I look back, the one thing they did well was model. A number of things I hear others talk about (throwing leftovers in the garbage???), I never even really realized were possibilities, and they still sound absurd.
    I think requiring certain contributions in a young child, then giving them more choice as they get older is a great way to instill some good norms in the kids.
    I also love the ‘Bank of Mom and Dad’ idea that I have seen elsewhere that allows older children to borrow money against their future allowance, then repay with interest. A great way to let a kid screw up and learn when the consequences are still low!

  3. Katie says:

    Neat idea, but isn’t the oldest kid here like 5? Isn’t it a bit early to be stating with certainty what will happen after age 8?

  4. Baley says:

    He might as well have a plan in place. That doesn’t mean it’s set in stone. What’s wrong with sharing his idea of what he wants?

  5. Kai says:

    It’s entirely reasonable to have the system thought out in advance.

  6. kc says:

    I think the idea is ok, but I can’t help but feel you overdo things with your kids. Trent, your family didn’t have a lot when you were growing up, and your response was to go on a spending and lifestyle binge when you were first independent. What might happen with your kids when they’re finally free? All things in moderation..,

  7. Katie says:

    There’s nothing wrong with having a system in place, it just seems like kids change a lot between 5 and 8, and their parents change with them, and stating something like that as if it “will” happen is a bit premature. There’s something to be said for giving yourself the flexibility to respond to what life throws at you.

  8. Katie says:

    I like the concept. I got $5 every week as a kid from middle school on. I kind of wish my parents would have gotten me in the habit of giving away part of my income as a child.

    Kristen at the Frugal Girl does something similar with her kids: http://www.thefrugalgirl.com/2010/02/monday-qa-kids-money-childrens-birthday-parties/

  9. Joseph says:

    I think this is an excellent system. My parents starting doing this for me when I was about 5. I loved it then, and I’m grateful now for the excellent money management skills it instilled, which have allowed me to establish a strong financial foundation at an early age. I definitely plan to use this system with my future children.

  10. Kai says:

    His kids are getting a pretty decent chunk of change every week just for existing. I don’t think this is depriving the children – it’s just giving them a good grounding in a reasonable norm. It gives the a chance to learn how to spend money, with more freedom awarded as they get older, but with an understanding that one should always put at least some money to places other than immediate spendings.

  11. Dave says:

    These segments look really familiar. I have been doing this for myself all along. This really works well for me. I will be implementing them on my kids as well. Good to make them learn and understand at a young age. Thanks for sharing!!

  12. Joan says:

    This is a great idea for your kids! I just remember putting coins in a piggy bank when I was young. As I got older, dad and mom always said don’t waste your money, always save some. Well now that I am older, I wish I would have saved more!

  13. Kristina says:

    I have a program similar for my children. My 5 kids do have chores, the older ones do more complex chores than the younger ones, and they get a certain amount of money every month for doing their chores. I do only pay them once a month, because we get paid only once a month. They also have designated donating (10%), spending (30%), and saving (60%). Their savings is specifically for a down payment on a house. I would hate for them to fritter away their birthday and Christmas money. Any gift cards they get they are allowed to go crazy with, but money goes into savings. They are all learning that they need to save up for bigger purchases, and are all so proud that they have money for a house one day. My 7 year old already points out houses that have for sale signs in front of them.

  14. Jennysays says:

    We are readers of your blog, and enjoy gathering information that can help our family. In fact, I am sure that I put your site down as one that we follow, and will even mentioned it in some of my posts. This is a great issue to debate with families, since we are all so different. We tried this with our kids, when they were 5 and 3, and it went over very well. My son saved up for a Wii by himself over a full year. Now that our oldest is turning 8, we have been trying out the WORK FOR PAY system, to teach him that in the real world you need to work for money. How do you feel about this?

  15. erika says:

    I do this with my kids, but we give dimes. I looked into the Money Savvy Pig but it was almost $30 x 3 kids, which seemed to contradict the idea of making wise spending choices. So I made container banks for them instead, and each Sunday they get their allowance and we talk about where to put their coins. They’re both required to put one coin in each section, and the rest are up to them. My 7yo is saving for a DVD she wants, so her choices are targeted, and my 4yo just enjoys the process and doesn’t care yet about the result. But, as Trent and commenters have mentioned, it’s the weekly conversations we have about money and saving and conscious spending and opportunity cost that are the most valuable piece of this.

  16. Geoff Hart says:

    Another useful trick: instead of giving allowance each week, give it monthly or even quarterly. We do that (quarterly) because it teaches the kids to budget: if they know that they have a big dinner and movie weekend in a couple weeks with friends, they can avoid spending money this weekend so they’ll have this weekend’s allotment ready to add to next weekend’s allotment.

    Though kids can also learn to budget with a weekly allowance, this provides less incentive than having to allocate money over a period of 1 or more months. This kind of practice with longer-term planning (in theory) may teach them not to live from paycheque to paycheque, spending all their money as soon as it arrives.

    Obviously, this works better with older kids, and we still kick in extra money for anything special that we don’t feel the kids should be spending their allowance on (e.g., participating in sports, special travel opportunities).

  17. J Marie says:

    I love this idea! My daughter is really motivated to save her money now that she has a goal in mind (an Ipod Touch). as money jars. This is really helping to teach her to delay gratification. Maybe she will never fall into the credit card trap!

  18. Kai says:

    Moving to longer spending terms makes sense to me as the kids get older. A week is a long time for a 6-year old, but a 12-year old should be able to learn to budget on a monthly basis.
    I know some people give their teens an annual clothing budget and leave it up to them to figure out how that works.
    I think it’s all a great concept that can be expanded to more and more as they get older so they’ve had a chance to try out spending, saving, budgeting, and failing before they are out where it counts.

  19. Frances says:

    I did this with my son from about 8 or 9. One jar said “dreams,” and we would tape a picture of what he was saving for. One for charity, one for everyday spending, another one which I don’t remember how it was labeled.

    Now he is 31, he has money stashed in various bank accounts for a new car, emergency fund, travel etc. I think he has more in his accounts than I make in 6 months!

  20. Evita says:

    I am not sure how this article relates to “365 ways to live cheap” ?

  21. valleycat1 says:

    Evita #19 – The way I relate this to the series theme is that you’ve set a fixed amount to give your children on a routine basis, rather than giving them a little bit here, a little bit there as they decide they want to buy something or you randomly decide to reward them.

  22. David says:

    If a child extrapolates from the formula above, she will conclude that at 27 she will be in receipt of 54 quarters a week. The prospect of an annual income of $702 will certainly encourage living cheap from a very early age.

  23. Kai says:

    The average child would probably find the concept of a salary of $702 to be enough to buy a car and a swimming pool…

  24. We teach a system called The Money Jars in our Camp Millionaire camps. It actually has 6 jars. We teach the kids that money actually has at least 6 jobs:
    • Living (55%)
    • Freedom (10% or 12% if female)
    • Saving (10%)(Saving up for and Just in case)
    • Education (10%)
    • Play (10%)
    • Donation (10%)

    The kids (and their parents) really like seeing that money does have all sorts of uses and when you plan for those uses, there’s more of a chance you’ll have the money.

    Bottom line…it’s all about getting into great money habits as kids so it carries into adulthood.

  25. Karen Cook says:

    I personally see this as overly controlling and arbitrary. It doesn’t teach frugality, but rather that as an adult you get to force your child to do what you want.

    Better to say to a child ‘here’s how Mom and Dad figure out how to spend their money. Here’s the bills we have to pay, and here’s the money we have (like get the money in cash to demonstrate). Talk to the kids about what they want to spend their money on, and about saving for those things.

    Talk to them about charity, but don’t force them to put their money in a jar; that makes for resentment. 20 years from now, will your kids still put money in a jar for donations? I doubt it; you won’t be there to reinFORCE the habit. Read a story in the news about someone in need and discuss how to help. Encourage their natural kindliness rather than force it.

    As for ‘investments’, well, given that banks are paying crap for interest right now, I suppose a bunch of quarters in a jar is fine. Except there’s no demonstration of interest, or compounding, or the penalty for early withdrawal, or what you can do with savings. If parents drop a nickel in the investment jar every so often and point out that is how it works in banks, ets., that’s more real than a mere pile of quarters.

    If my parents had talked with us kids about how they handled money and temptations to spend and how to save for this and that, I’d have had those lessons early on and be the better for it. Instead, I wondered why I had only one pair of shoes, among other things; I never knew that my parents had money problems, I just thought they were stingy and mean.

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