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Determining A Kid's Allowance

A recent survey showed that only half of almost 9,000 teens interviewed received an allowance.

The big question for parents is: How much money should you give your kids and how often. So The Early Show's Financial Adviser Ray Martin shares some basic guidelines.

When to start?

Most parents begin giving money to their kids for simple tasks, such as mowing the lawn or organizing Dad's shoes in the closet. This begins at the preteen ages in the amount of a dollar here and there.

This goes up as kids learn the costs of things and become more independent in their spending. But there really isn't a right or wrong here; it's a personal decision.

Should allowances be earned?

Be aware of the behavior that this financial transaction can encourage. For example, if you pay your kids to clean up their rooms, what will be their behavior when they are not paid to do so?

On the other hand, paying for good grades is consistent with the way most adults are rewarded in their working lives.

Be consistent within the family. Paying a regular allowance to one child and handing over a 20 spot whenever asked by another will foster different future money habits among children of the same family - along with resentment.

Some parents do not give allowances because they provide activities, transportation and other expenses and let their children know that this is their policy instead.

Consider paying a job-based allowance for good grades and additional household jobs - things you would have paid another to do, such as washing a car, mowing the lawn or shoveling snow.

To avoid future problems, try to avoid paying kids an allowance for picking up after themselves or for contributing to daily housework.

How often should you pay?

Parents commonly pay an allowance in one of the following three ways:

  • As requested or needed.
  • Regularly as set periodic payments, usually weekly.
  • A combination of the two.
The problem with the first choice is that it's difficult to keep track and neither the parent nor the child has an idea of the amount of money granted over the course of a year. This fosters money habits that can lead to future spending problems.

Paying a set amount on a regular basis sets the stage for money management habits that are more useful in the real world. Children might more quickly learn that their spending has limits and that budgeting is important because there is no more money until the next paycheck.

What is the going rate?

According to a few surveys, $30 to $50 seems to be the median amount, but allowances can range from a couple of bucks to more than $150 a week.

More than 51 percent of the nation's teens (about 10 million) do not receive an allowance.

Family size also matters; where there are five or more kids, the median weekly amount drops. Parents often pay more to an only child - one of the perks.
One technique is to discuss with your children their spending needs. Ask them to present a spending budget based on weekly or monthly expenses. After what may prove to be an interesting exchange of give and take, agree on the final budget.

This helps children develop budgeting skills, teaches responsibility and prepares them in personal money management.

How does a real job affect an allowance?

Parents often end allowances when teens get their first job. Many teens see such a cutoff as a downside to landing a job, especially if their allowance paid for daily household duties they must continue performing.

Alternatively this milestone can be viewed as the child being promoted to a higher-paid job, something that helps establish realistic financial expectations.

Also consider encouraging saving and investing by setting up an investment fund or account and offering to match each dollar contributed up to an annual limit.

Are taxes a concern?

When giving an allowance, do some easy math and figure out if the amount granted over the course of the year equals more than $10,000. When the total is less than $10,000 per year, money given to kids is neither taxable to them nor must the parent report it.

When the total of all gifts and allowances is greater than $10,000, however, there's a chance the IRS may question you. If you go over $10,000, the amount must be reported to the IRS. It's possible a gift tax may be assessed on the donor.

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