Did you know that only five in 10 American adults possess financial literacy knowledge? A parent can prepare their children to handle their finances successfully as adults by giving them an allowance and having frequent, open discussions about money.

Why give an allowance to kids

An allowance can teach kids financial skills like budgeting, decision-making, and responsible spending and saving. Consider your family's budget and values as you determine if you want to give your kids a consistent allowance.

When to start giving an allowance

Children as young as three can count coins and understand that things cost money. You can evaluate your child's maturity to discern when they're ready to make thoughtful spending and saving decisions.

Ways to earn an allowance

Whether or not you tie an allowance for kids to chores will probably depend on factors like your family's values, budget and needs, and your child's maturity.

Tying an allowance to chores may teach your children to connect money with work and develop an appreciation for effort, perseverance and commitment. Alternatively, this allowance payout structure might prompt kids to do only the minimum amount of work or expect to get paid for any household task.

Giving an allowance without a connection to chores could help your children develop financial management skills as they make meaningful family contributions with no expectation of rewards. This allowance structure might create feelings of entitlement and hinder work ethic development, though.

How much allowance to give

For a chore-based allowance, you could assign a dollar amount to each task and reward your children for the jobs they complete properly. With this structure, your children could earn more by doing extra tasks.

With an allowance that's not connected to chores, you could give your child $1 per week based on their age. So, your 12-year-old would receive $12 weekly. This structure gives your children access to more money as their financial understanding grows.

Consider setting spending guidelines

To ensure your allowance for kids teaches financial literacy, you may create saving and spending guidelines. For example, you might encourage your children to save for future needs or give to a charity before they buy things they want.

You could also remind your kids that you won't offer loans or allowance advancements. These guidelines can equip your kids to make mistakes, delay gratification and develop practical money management skills they'll use as adults.

Talk about money often

Frequent conversations about money reinforce the financial lessons your children learn as they manage their allowances. As a family, you can identify wants versus needs while playing pretend store or discuss budgeting while shopping for household essentials.