Lesson 1: Financial Advice For Kids

Structuring an Allowance

For the purpose of this lesson, a “child” refers to individuals aged approximately 6 to 14 years, as this is the stage at which parental allowances are most commonly used to introduce financial responsibility.

Research in the UK suggests that 71% of parents give their children allowance and 85% of them believe that money skills are important. However, In the UK alone, it is estimated that approximately 1 million UK households do not save for their children¹. Allowances should be age appropriate and generally limited, as most necessary items are often bought by parents, such as groceries and household items. Accordingly, most children use their allowance to purchase discretionary items such as toys and snacks instead of saving or strategizing for a larger purchase ³. Around 51% of parents struggle to explain money to children, therefore it reinforces the need for structure ¹.

A core component of structuring an allowance is consistency as it allows children to:

• Develop a sense of financial stability 

• Learn to budget with restrictions 

Therefore,  providing a consistent allowance encourages children to develop sustainable spending habits. A child’s age and the financial comfortability of the parents further impacts the development of a child’s spending habits. ⁵ 

Earning Beyond The Allowance:

Children should also be allowed an opportunity to gain additional money through responsibilities and tasks. For example:

1. helping with household chores (cleaning dishes and laundry)

2. completing extra tasks beyond expectations 

Overall, this will introduce  kids to an ‘earned’ income based on their efforts.

This aligns with operant conditioning, where positive behaviours are reinforced through awards.

Spending Guide

Around 65% of parents struggle to let their children make ‘money mistakes’, which are described as poor financial decisions made by children, such as spending all their allowance immediately and buying low-value items impulsively ³. Instead of directly controlling what parents believe that their children should spend their money on, parents can practice indirect guidance.

Behavioral economics research shows that low-risk environments help individuals develop financial understanding, which in turn enables better long-term decision-making in the future. 

Parents can suggest things like:

• Encouraging the kids to think before spending 

• Proposing reflective questions (would you want this now? or something bigger later)

• Suggesting the idea of dividing money into sections (giving, saving and spending)

Avoiding Financial Punishment

Although parents may think that a good punishment is to reduce the money they give their children, this approach can be ineffective. However, this can be very counter-productive, as in the real world people often face consequences through mistakes, not a reduced income. This relates to loss of version, because often people fear losses to gains, causing the child to develop an insecurity towards money.

Instead parents should:

• Keep allowance consistent

• Use non-financial consequences (e.g., loss of screen time)

The Role of Parents

Children often learn from observing parents, making parents crucial role models to display responsible financial behaviours that explain the difference between needs and wants ⁴. Overall, this helps children understand that financial decisions are not just about money but also about priorities and values.

FOOTNOTES 

¹ Wells Fargo – Parents and Allowances Study Wells Fargo (2023) reports that 71% of parents provide an allowance to their children and 85% believe teaching money skills is important.

² UK Government – Family Savings & Wealth Statistics

UK Government (Family Resources Survey) data suggests around 1 million UK households with children have no savings set aside for them.

³ Money and Pensions Service – Children and Money Habits

The Money and Pensions Service explains that children commonly spend pocket money on small, discretionary items such as toys and snacks, rather than saving for long-term goals, particularly without structured guidance.

⁴ OECD – Financial Literacy and Education Report

States that children primarily develop financial behaviours by observing parental habits, highlighting the importance of role modelling in early financial education.

⁵ Young Money UK – Teaching Children About Money

Explains that regular allowances help children develop budgeting skills, independence, and confidence in managing money over time.