Allowance is one of the most misunderstood aspects of child rearing. You'll find very definite opinions either way. I have become a great believer in allowance starting at a young age. My oldest gets an allowance. We started this past year (he was 4) and we've had some great success with it. My rationale for giving my child an allowance was to teach him the value of money and how to manage it. The formula we use is called S.O.S. I don't take credit for this by any means, it is one my mom passed on to me that a friend of hers passed on to her.
S.O.S. stands for Save, Others, Spend.
The rate of allowance is equal to the age of the child. For example, my 5 year old gets 5 dollars each week. I know that sounds like a lot at first, but it has actually ended up saving us money.
He has to save a portion in his bank account ($2.50). This money is used for things that come up during the year such as birthday presents for his friends and family.
The others part comes in as how we think of others in charity. He used 10% towards this or 50 cents. He puts that money into his Sunday school collection each week. The Sunday school sponsors a child in Peru and he knows who this boy is by the picture and information he's learned at Sunday school.
The remaining $2 is his own personal spending money. When he first started to get allowance he went nuts with this, wanting to spend it right away at the dollar store. He quickly learned that dollar store things break fast. He also learned that the really big, wonderful toys and treats cost a lot more money. He voluntarily asked if he could put his spending money in the bank with his savings. He is saving for a big toy fire station and is pretty close to buying it now.
Along with his allowance we keep an allowance chart on the fridge. There are certain jobs that he has to complete daily and weekly in order to get his full allowance. He receives deductions for jobs not completed. He can make these up by doing jobs considered bonus. His daily jobs include: making his bed, putting his laundry in the basket, setting the table, cleaning up any toy messes he makes (without a fuss). His weekly jobs include, putting away his clean laundry, helping with dusting and helping me clean the bathroom. Any other jobs are considered bonuses. You can tailor the jobs as you consider the age and ability of your own child.
We've found this ends up saving us money as mom and dad are not the money tree. He knows not to ask us for toys or other treats when we are out as our response is always the same, "that's why you have an allowance, do you want to use it for that?". Sometimes the answer is yes, and sometimes no (he really, really wants that fire station). It also saves us every time he gets an invitation to a birthday party. He comes and does the shopping for his friend. It works really well. Most importantly it is giving him lessons in money at a young age. He's already developing a relationship with a bank (so it won't be such a scary adult thing when he is older), and he's learning how to budget (something we can all use a lesson in).