The Right Way to Give Kids an Allowance

Jake Johnson's approach to providing his son Liam with some money of his own is inventive. The Tempe, Ariz., dad encourages his 9-year-old to identify problems around the house, propose solutions, and then (my favorite part) negotiate his payment. Case in point: The boy recently raked leaves in their yard to make $10. Says Johnson, "I want him to see that earning money can be creative and fun, not something you do just because someone tells you to."

The concept of an allowance is evolving. Today, 70% of kids get one, says T. Rowe Price, up from 47% in 2013. While many parents use this device to reward children for doing their everyday chores, many of the moms and dads I've spoken with say they prefer to use the weekly dole as a teaching tool—a way to help their offspring learn about budgeting, trade-offs, and critical thinking about money.

What's the best way to accomplish that? Try these tactics.

Reward Extra Effort Only

Don't tie regular chores to the allowance, says Beth Kobliner, author of the forthcoming book Make Your Kid a Money Genius (Even If You're Not). You want your child to understand that being part of a family requires doing some tasks for which you will not be compensated—say, stacking the dishwasher and keeping your room clean.

You can, however, give a bonus for odd jobs above and beyond expectations, as Johnson has done. "This instills the critical linkage between work and money," says Bill Dwight, founder and CEO of online family banking service FamZoo.

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Make it a Budgeting Exercise

Some experts recommend giving $1 a week for each year of age, so a 10-year-old would get $10. Or, work out what you expect them to pay for—say, snacks at school or new videogames—and figure the right amount from there. Then, as your child gets older, have her start covering larger purchases you'd normally make, says Kobliner. You might, for example, let a teen manage the $300 you've budgeted for back-to-school clothes. If your kid spends his funds too fast, leaving himself no money for gas, he'll be reminded each time he takes the bus to school the rest of the week. "Let them experience the consequences," says Dwight. "No bailouts."

Instill Lifelong Habits

Just 1% of parents surveyed by the American Institute of CPAs say their kids set aside any money. Encourage better behavior in a younger child by establishing separate piggy banks for spending, saving, and giving, then let her help choose a charity to donate to. Help tweens or teens set a specific savings goal, and consider a "Mom and Dad" match of, say, 25% up to the first $100 saved, Dwight suggests. Nothing will get a child (or adult) more excited about saving than the promise of more cash.

Financial correspondent Farnoosh Torabi is the author of When She Makes More and the host of So Money, a daily podcast.