While parents without substantial resources tend to discuss family financial matters with children out of necessity, those with means often avoid the topic. However, even for parents who are in a position to cover all of their family’s financial needs and desires, the provision of an allowance can still be an effective way to have an open and ongoing conversation with children about money and related values.

Ideally, this interaction should start when they are young, perhaps as early as first grade or whenever they learn how to count. As to how much is appropriate to give, it is probably best to begin with small allowances and then increase the amount every year while expressing what additional expenses should be covered by the children with these extra funds. This will allow for more frequent “raises,” and provide evidence in the process of your ongoing approval of their financial behavior and general trust in their judgment. Give them sufficient funds to purchase some of the typical things they want or need, but not so much that they are not forced to make “critical” choices; and then also clearly define your expectations about what you will no longer purchase for them. It may also make sense to establish the practice of saving and donating portions of their allowance.

Some parents use allowance as a reward for completing chores; others deem performing tasks around the home as basic givens in order to keep a household running and the obligation of every family member to pitch in. Some use modest allowances purely as an opportunity to teach children to develop particular financial skills and values. How to approach this aspect and expectation of an allowance is really just a personal preference for each parent to determine for their particular family.  In any case, at age three or four, children normally begin to understand that they are members of a family and are mature enough to tackle simple tasks. You might consider proposing special chores, such as those that you would otherwise normally pay someone else to perform, and use these as chances for children to collect additional money, tailored to each child’s age and ability.

Some experts suggest dividing the allowance into three distinct categories – spend, save and give. The exact amount for each objective will vary based on your priorities as a family, but each presents an opportunity to teach and develop important skills and reinforce positive character traits.

SPEND – Setting clearly defined expectations about what these funds should purchase is helpful to your child. When parents cease to cover all expenses for a child, he or she learns to make choices and assume responsibility for his or her actions. Because children will not be able to purchase everything at once, they will learn self-discipline and reflective thinking. Granting them permission to be responsible for how they spend will give them a sense of autonomy. Let your children make mistakes with their allowance and do not be tempted to rescue them. When children experience failure, they learn about consequences and how to recover. Learning this valuable lesson is much easier when the amount of money is fairly negligible.

SAVE – Encouraging this behavior helps teach delayed gratification and personal discipline. Have your child make a list of the items for which they are saving and how much they will cost. This creates well-reasoned targets and gives them actual goals. When other cash gifts and additional monies are subsequently earned, a portion of them can be carved off for this important category once the saving routine is developed. Just be sure to establish rules with your child. For younger children, keep the goals relatively short-term to achieve the greatest likelihood of success.

GIVE – As early as age four or five, children begin to develop the capacity to understand other people’s feelings. They also appreciate the concept of sharing and have mastered the fundamentals of counting. This is when you can introduce the idea of philanthropy as a way to assist children in developing compassion. Help them decide on a local charity, and at the end of each year or at some other appropriate time, accompany them to deliver their donation in person. This is a great tool to clearly communicate your family philosophy on philanthropy and get the child into the habit of building charity into the budget. For older children, discuss their concerns about the world and help them find charities that address those issues.

Whether or not chores are part of the quid pro quo of the family allowance, it is often challenging to find occasions that will pique children’s interest and hold their attention when discussing financial literacy. By actively engaging them in the process of being responsible for their own money at an early age, it is possible to create a solid foundation to raise financially healthy individuals able to spend wisely, plan carefully, and live within a budget while simultaneously instilling important additional values such as patience, generosity, and perseverance.