It is crucial to ensure that if you decide to set up an allowance, make sure your children understand the concept of money and the difference between ‘need vs want’ early enough as well as understanding why they’re getting it, how they can earn it and how they can lose it.

In our rapidly changing world, children from time to time need some money to buy small things that they need without necessarily asking their parents/guardians to buy for them. That’s how an allowance comes in, which simply put is money given regularly for a specific purpose.

Generally speaking, child allowance is money from a parent/guardian given to a child as an offering which in turn equips them with valuable life lessons about how to handle money responsibly – how to budget, save, spend, give and understand the value of money. The amount given depends on the age of the child which also determines the nature and number of needs. How much to give also depends on the family’s financial ability.

There is much debate over whether to tie an allowance to household chores, good behaviour or simply give freely, especially when kids can find everything they need at home.

Many financial experts like Ksenia Yudina, however, recommend allowances, as in many cases, they set precedence to your kid’s financial literacy journey.

It is crucial to ensure that if you decide to set up an allowance, make sure your children understand the concept of money and the difference between ‘need vs want’ early enough as well as understanding why they’re getting it, how they can earn it and how they can lose it.

There are four types of allowances:

Chore-Based Allowance

This is exactly what it sounds like. You give your child a certain amount of money each week or month for completing certain tasks. The catch here is that your child sees a direct correlation between effort and the money they receive.

Ksenia Yudina, founder and CEO of the money app UNest, urges parents to incentivize their kids to negotiate for more money by taking on additional responsibilities. “This will teach your child the value of hard work,” she says.

It is also important to note that a parent is required to keep track for this allowance to be effective and there must be consequences when the child doesn’t do the chores.

The downside here is that kids may not be motivated to do their chores when they don’t need the money as well as teaching them that working for money isn’t always fun.

Unconditional Allowance

This allowance consists of giving a set amount of money to your kids without requiring them to earn it by doing chores. It lets you maintain money lessons and chores as different issues.

The benefit here is that kids learn that chores are a part of life, but the downside, however, is that this method doesn’t teach them that pay is compensation for a job well done.

Pay-as-Needed Allowance

In this allowance, money management is considered each time a situation arises. Kids do not regularly receive a set amount of money, rather, they only ask for it when they need it and they receive it at their parents’ discretion.

This allowance may be suitable for parents who don’t feel kids should earn money for doing chores, but should receive the funds simply by virtue of being a family member.

The downside here is that it may be challenging to give an allowance if you are on a small budget, but have a large family.

Hybrid Allowance

This allowance can be a mash up of the three as it works for parents who do not believe in paying their kids to do basic household chores while at the same time feeling the need to cultivate entrepreneurial and financial literacy skills in their children.

Here are a few tips to help make the most of the money lessons that an allowance can teach:

Start early – Studies have shown that children begin to grasp money concepts by age three and that many of their money habits are set by age seven. Pay attention to when they start asking questions about money and match the lessons with their age and maturity level.

Be consistent – One of the greatest things an allowance can do is teach your kids how to budget and once you have a system in place, you need to stick to it.

Whether you pay weekly or monthly, do it consistently so they understand the value of making their money last.

Paying them early by giving in to their whining and begging could be akin to payday loans, which is the exact opposite of what you want to teach them.

Help them set goals – Teach them how to set better goals and the value of delayed gratification by skipping short-term wants, like sweets, in exchange for attaining longer-term goals like buying a bicycle.

Introduce them to banking – These days, there’s an app for everything including money management which can be used by tweens as well as creating simple worksheets for younger children.

Open savings account for your kid’s longer-term savings and show them how to check their balance online as well as the value of compounding money. You could also choose to buy them different piggy banks with different categories.

Keep a written tab – Modern times have shown us time and again that expected money does not always hit our accounts as planned. It is therefore important that your kids learn the same.

If you don’t always have the cash available on allowance day, keep a written record by adding that week’s amount to your child’s tab and then when you buy something for them, subtract it from the tab.

Mind over matter – It is important to remember that it’s often more about the practice than the amount. KSh100 a week can teach the same lessons as KSh1,000 can. Do what makes the most sense for your family.