Most Americans Pay Their Children an Allowance. Here's Why You Should, Too.

A little goes a long way when it comes to our children's weekly allowance. How $5 today could turn into hundreds of thousands of dollars tomorrow.

Mar 29, 2014 at 5:00PM

Do you pay your children an allowance? If you do, you're not alone. According to a Harris Interactive poll released earlier this year, approximately 60% of parents with children ages 4 to 17 dole out cash on a weekly basis.

Images

Source: flickr/401(k)2013.

It may seem ludicrous to pay a 4-year-old a weekly allowance, but depending on where that money actually ends up, it could be the best thing any parent can do for a child. Today we're taking a closer look at the Harris poll and considering the real power of a child's allowance.

Poll stats
Harris Interactive polled 2,311 adults on all things allowance-related last December. Though there were trends that emerged along gender and regional lines, the biggest dollar-amount discrepancies in the responses were generational. Echo boomers (known as millennials in some circles) and Generation X respondents were closely aligned when it came to appropriate amounts for a weekly allowance -- baby boomers less so. Take a look:

 

Generation

Kid's Age

Echo Boomer

Gen-X

Baby Boomer

4 to 9

$5.10

$5.40

$3.10

10 to 13

$10.60

$10.10

$7.30

14 to 17

$18

$18.80

$14.00

Source: Harris Interactive 

Oh, to be the child of a Gen-Xer! These parents think children aged 14 to 17 should earn a weekly allowance of $18.80 a week! Interestingly, the poll also revealed that 86% of respondents believe a child should have to earn his or her allowance, and that it should only be paid if the child works for it.

Most importantly, however, is that 90% of respondents thought that an allowance was a good way to teach children about money. In theory, that is absolutely correct. It's hard to understand the power of a dollar if you've never earned one. And while one might argue that a 4-year-old is incapable of understanding this at all, a child of 7 or 8 is not. Financial literacy is a major problem in this country -- in most countries -- and if handing out an allowance can help change that, then by all means we should pay up.

But how many of us truly recognize the power of a weekly allowance? Consider those dollar figures from the poll. Let's take the midpoint allowance figure for each age range -- $5.10, $10.10, and $18.00 -- and encourage our child, Little Susie, to put every penny of it into an index fund. Assuming that Susie gets grounded for two weeks each year and doesn't earn an allowance during that time, she will contribute 50 weeks of savings to her nest egg every year. It will compound annually at the S&P 500's historical compound annual growth rate -- with dividends reinvested and adjusted for inflation -- of about 6.8%.

Susie's Age

Allowance

Annual Contribution

Nest Egg

Age 4

$5.40

$270.00

$270

Age 5

$5.40

$270.00

$558.36

Age 6

$5.40

$270.00

$866.33

Age 7

$5.40

$270.00

$1,195.24

Age 8

$5.40

$270.00

$1,546.52

Age 9

$5.40

$270.00

$1,921.68

Age 10

$10.10

$505.00

$2,557.35

Age 11

$10.10

$505.00

$3,236.25

Age 12

$10.10

$505.00

$3,961.32

Age 13

$10.10

$505.00

$4,735.69

Age 14

$18.00

$900.00

$5,957.71

Age 15

$18.00

$900.00

$7,262.84

Age 16

$18.00

$900.00

$8,656.71

Age 17

$18.00

$900.00

$10,145.37

Source: Author's calculations.

On the eve of her 18th birthday, Susie will have grown her hard-earned allowance into $10,145. if she had simply left her allowance in her piggy bank, she'd only have $7,240. 

But maybe Susie isn't sold on a mere $10,145, so her parents sit her down and show her what it could turn into if she leaves it in the index fund:

Susie's Age

Nest Egg

Age 18

$10,835.25

Age 28

$20,919.51

Age 38

$40,389.09

Age 48

$77,978.81

Age 58

$150,552.91

Age 68

$290,670.98

Source: Author's calculations.

Provided the fund returns the 6.8% historical figures, even if Little Susie stops contributing any money to her savings, she'll have turned 14 years of allowance into more than $290,000 by the time she reaches retirement. It's not enough to retire on, but it is enough to make a point about the value of saving. 

Will Susie head to college and pursue a degree in economics or finance? Maybe not, but she will definitely understand the power of compound interest, something that will have an incredible impact on her for the rest of her life; say, when she gets her first credit card, pays off her student loans, decides how much to contribute to her 401(k), buys a house, and so on. This is the real power of a weekly allowance. The ability to confer financial literacy, which may be the greatest investment we make.

Teach your children to invest
In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. It's easier than you think. Click here to get your copy today -- it's absolutely free.

Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers