Managing Allowance: Moving from Cash to Categories

I spend all day every day teaching people how to align their money with their priorities. I’ve seen breakthroughs in individuals. I’ve heard thousands of stories from people whose lives have been changed by the Four Rules. So why is it that I have such a hard time teaching my own kids these principles?

For YNAB, I’m a writer, a podcaster, a live communicator, but I primarily think of myself as a dad. I have four kids, just over the amount of kids where people start looking at you funny. (As Jim Gaffigan said, “After the third kid, people just kind of stop congratulating you.”) And they run the full spectrum of pre-teen to childhood.

My oldest, Flora, is right on the cusp of the middle-school crazy time at 10 years old. My youngest, Gil, is a ridiculously-cute, terribly-destructive 2-year-old. My fierce 5-year-old, Josie, is about to start kindergarten, and Teddy is as wild and free as an 8-year-old boy should be.

So when it comes to parenting, I am in it right now. I don’t claim to be an expert on parenting by any means, but I have tried a lot of techniques to teach my kids about money. So the purpose of this blog is to share that journey, and hopefully you’ll pick up some ideas along the way!

A word about chores

First, let’s discuss the age-old question: should I give my kids an allowance in exchange for doing regular household chores? The argument for this arrangement is that it’s important to teach children that money comes from work. And that is important. 

But in my experience, paying kids to do regular household chores was not a productive way to teach them that principle. In fact, for my kids at least, I’ve found it makes them even more entitled. If you’ve tried this with some of your less-agreeable children, I wouldn’t be surprised if you’ve had a moment where one of them sacrificed their allowance so that they didn’t have to do their chores. What do you do then? Do you increase their wages? Where does that end? Do you force them to do their chores and engage in this economic transaction anyway? That jeopardizes the lesson you’re trying to teach. 

I don’t want my kids to have a transactional relationship with their regular responsibilities. I want my kids to do chores because they are a part of this family. That teaches them to value their community, that it’s a virtue to work for the good of the collective without any individual compensation. 

Instead of tying an allowance to chores, I teach my kids that money comes from work by explaining how our household makes money, by encouraging and supporting the older ones to start their own little businesses,  and occasionally by paying them for special jobs that I wouldn’t normally expect them to do.

Sign up for YNAB's newsletter, Loose Change, for twice-monthly money insights right in your inbox!

At their age, the purpose of an allowance is to give them a chance to practice with money—and introduce them to the concept of giving every dollar a job. I want them to have enough to make meaningful spending decisions without a bunch of practical and moral complexities. We have enough of those complexities to worry about as parents already. 

So now that we’ve got that out of the way, let’s get down to brass tacks. As my kids have gotten older, I’ve tried all sorts of practical ways to teach them about money, from coin jars, to cash envelopes, to software. So let’s get into it.

Conversations

For all our talk about allowances, I’m going to go out on a limb and say that giving a toddler an allowance is going to cause a lot more trouble than it’s worth. There is no way to get a 2-year-old to value strips of green paper for anything other than the absolute joy of ripping up and throwing it over their head like confetti. However, you can have age-appropriate discussions about the scarcity of money.

I started talking to my kids about money as soon as they were able to have a conversation with me. And I even found that they learned more by watching than talking. 

I was shocked one day to find that my son Teddy understood how YNAB works intuitively when he was not even three years old. I’m not joking—I wrote the whole story in a blog called “How My Two-Year-Old Started Budgeting.”

Check that out if you want the full story, but here's the Sparks Notes version: when he asked me to go out for ice cream, I showed him in the YNAB app that our Entertainment category was nearly empty. I explained that we didn’t have enough money right now to go out for ice cream. Instead of throwing a tantrum like I was expecting, he simply said “Den we won’t go!” and ran off to keep playing in the mud. 

Now, there have been hundreds of times when I’ve said no and a tantrum did follow. But in that moment, I learned that I could begin teaching my children about prioritization and trade-offs much younger than I ever thought. You just have to let them in on your world, and I promise in their own way they’ll start to get it!

So start having conversations and demonstrating your approach early! As your kids get older, you can put more concrete systems in place, starting with some simple coin jars. 

Coin jars

When my kids were 3 or 4 years old, I wanted to bring some cold hard cash to the table in the form of quarters and coin jars. At this age, they don’t know how to count money, so they’ll never be able to connect an amount of money to the price of a toy. But they do intuitively understand containers and space. 

So I went to the bank, got four rolls of shiny new quarters, then picked up some small, transparent glass jars from Wal-Mart. I explained to them that every day we’d put a quarter into the jar. Sometimes, I’d add extra coins as a reward, but we mostly focused on the ritual of adding a new coin every day. Every few days, they loved checking how filled-up the jar had become. When the jar was full, we’d go to the store and let them pick out a new toy. There was no literal connection between the amount of money in the jar and the price of the toy. If the jar was filled up, they’d get something new! 

As you can imagine, my young kids were super into this idea! Coin jars are a perfect teaching tool for kids who are too young to understand math, but are old enough to practice delayed gratification. It exposed them to the concept of money as a store of value and it taught them to save and enjoy spending. 

The biggest downside to the coin jars though was that there was no opportunity for them to make meaningful decisions with their money. So as they got older, we quickly moved on to a new teaching method—one that was a little closer to how my wife and I manage money.

Cash envelopes

Once my kids could count and understood the value of paper currency, I moved them to cash envelopes. I went to the bank and took out a hundred one-dollar bills. I wanted them to have something they could easily separate into envelopes, so smaller bills were better. Rather than envelopes though, I got them wallets with a few different sections. I gave each child five dollars per week. I set the expectation that one of those dollars would go into a giving envelope and the other four could go wherever they wanted. 

And something pretty magical happened. They started saving up for things! Flora set money aside for a new watch. Teddy started saving for a pair of Heelys. When their grandmother came by to bring them to the dollar store to buy cheap plastic toys that would break in 30 minutes, they had to make trade-off decisions. “I have nothing in my spending envelope, but I have $5 in my new watch envelope. Should I move a couple dollars from there so I can buy something at the dollar store?” This is exactly the kind of trade-off decision I wanted them to practice making. It was working!

There were major downsides to this arrangement though, mostly around having to deal with cash. If they wanted to buy something online, we had to deal with a complicated transaction where I bought the item and the kids gave me their wad of $1-bills to pay me back. I kept finding cash lying around the house, because they often forgot to put it in their envelopes. Sometimes, I’d forget to give them their allowance every week, particularly because I wanted to pay them in a calm moment (rare in my household) so they wouldn’t leave the cash lying around the house. My 2-year-old, Gil, shares a room with Teddy, so it grew increasingly difficult to find a safe place for Teddy’s wallet away from curious toddler fingers. 

I knew the answer to many of these problems was to use the tool that I spend most of my waking hours convincing people to use. I needed my kids to use YNAB! But I had concerns. At their age would they be capable of connecting numbers on a screen to real money? What would I lose if I let go of the tangible nature of actual dollar bills?

Categories in YNAB

It turns out I wouldn’t lose anything, really. I set up category groups for my two older kids and had them set up categories for everything they might want to buy. We filled those categories with their saved-up allowance money and… they totally got it! 

Using YNAB to manage their allowances had all sorts of practical benefits. First, there was no more cash lying around and even the most manic toddler can’t mess up software. (Unless he gets a hold of my phone. Oh gosh, I hadn’t thought of that.) 

The kids understand the concept of digital envelopes in YNAB and can move money around easily. And I never forget to give them their allowances, because I set up a scheduled transaction to move money from the Allowance category to their individual spending categories.   

But the biggest win was that using YNAB facilitated many more money conversations than ever before. The problem with cash envelopes is their planning system was stashed away in their rooms. I never had any real visibility into how they were planning their money. Because I didn’t have visibility, we rarely talked about the decisions they were making. 

Now, if the kids want to make a change, they have to talk to me about it. And that leads to so many more teaching moments than I had before. I can guide them, talk to them about the wisdom of their decisions and still let them make the final call (most of the time). 

When they get to be teenagers, and especially when they have their own bank accounts, I’ll use YNAB Together to set them up with their own YNAB budgets. Then, I’ll have even more teaching opportunities as I add more and more complexity and expenses that they are responsible for.

By the time they are adults, they’ll have all the skills they need to make sure their money aligns with their priorities, passing on a lasting legacy of mindful spending and financial peace.

Do you want to help your kids learn to spend with intention? There's no better way than to learn it yourself first! Sign up for YNAB today. It's free for 30 days and might just change your life.