If you're just starting out with allowances, or planning to in the future, I highly recommend the book Millionaire Babies or Bankrupt Brats: Love and Logic Solutions to Teaching Kids About Money by Jim Fay and Kristan Leatherman. They also have a simple, step-by-step blog post on giving an allowance.
Many of the experts, including the Love and Logic authors, recommend separating allowance from household chores. Chores are something everyone in the family does to contribute. They are part of being needed and valued by the family. They teach responsibility. They are not optional. If you tie them to an allowance, a child can decide they don't want to do their chores with the consequence of just skipping their allowance. Probably not an issue at age five, but I can certainly see it being an issue at age 15.
At age five, Sydney is the only one old enough for allowance in our household, but it’s made a world of difference in many ways. She’s already learning how to spend wisely (and not so wisely) and the value of saving.
One of the biggest benefits has been in our shopping experiences. Sydney was infamous for having meltdowns at stores. She’d spot something she wanted and the dam would break. Through tears, she’d be screaming, “It’s SO IMPORTANT! I can’t live without it! PLEASE MOMMY! I need it!” and that could go on for the duration of our shopping experience, with nearly every eye on us (and consoling smiles from the parents who’ve “been there”).
Once we implemented a weekly allowance – we pay it every Sunday – the nightmare shopping trips were (mostly) over. She must bring her money with her for any shopping trip. She can purchase whatever she wants with her money. I only ask that she wait until we’ve traversed the entire store before she makes a decision, and in several cases what she held onto for dear life at the beginning of the store has been tossed for something else she can’t live without by the time we're checking out.
Sydney now understands that everything she sees has a price and that sometimes she can't afford it (that's why there's a "mostly" in the paragraph above - we've still had a few meltdowns when she's out of money or when something is out of her budget). I can see the wheels turning as she decides between two items and compares their cost and value.
It’s also made her a bigger helper around the house – she’s always looking for ways to earn more money. Being an American Girl Doll lover, she's started to ask, “How can I earn $100 Mommy?”