Kids and Allowances—How to Teach Kids a Lesson in Money Management

May 2015 View more

iStock_000016500928LargeAllowances: Good or bad? I asked 18 parents for their opinions on three types of money dispensation for kids: Allowances pegged to performing household tasks; Set-amount allowances distributed unconditionally; No allowance at all.

Emotions run surprisingly high on this topic, which makes me believe there is no absolute right or wrong. In the end, it’s more about how parents handle what should be a learning experience in money management. For what it’s worth, here’s the non-scientific results on each method.

Quid Pro Quo

The majority of parents I surveyed like allowances pegged to chores based on a simple belief that if children have to earn money, they’ll likely be choosier about their purchases. My neighbor’s 7th grade daughter lost her iPod touch on the heels of buying $50 PJ bottoms at an upscale store for pajama day at school. Not only did she dislike the PJs two weeks later, she wished she still had the $50 to start saving for a new electronic device. Now she needs to start over, chore by chore, to replenish her funds.

Parents need to be fair, though, about the price of chores. If you’d pay a stranger $20 to shovel the driveway, your child shouldn’t get $10.

On the Dole

A set allowance not pegged to chores supposes that kids need a certain amount of money as they get older, and will manage discretionary spending and saving with what is doled out. Chores are unpaid because all family members must pitch in. This is great in theory, but often harder to control without nagging.

I find that my friends who are constantly on the go with busy schedules find this approach the most convenient. However, I got a lot of hemming and hawing when I asked them if they have financial discussions that accompany the allowance.

Tom Walter, a financial planner and creator of a money course for Naperville 8th graders, has a different perspective. “What are we teaching our kids if they get an allowance for no work? We are saying, ‘Mom and Dad will always support you,’ and that isn’t how the world works. It causes a dependency that later in life can cripple adults from being on their own and successful.”

Let’s Make a Deal

Offering no allowance has its advantages and disadvantages. On the plus side, it gives parents the opportunity to discuss what expenses will be absorbed by Mom and Dad, “discuss” being the operative word.

When our freshman son begged for $100 sandals when $50 sandals would do, we discussed splitting the cost 50-50. After protestations, he “found” Christmas money to finance the purchase. He took excellent care of those sandals. That same year, he got a job as a golf caddy to avoid dealing with us every time he wanted to spend money. Unfortunately, he also felt no need to save since he was the master of his own financial destiny.

Which system works best?

Lewis Mandell, the former dean of business at SUNY, has studied decades of allowance research. “The prevailing wisdom is that allowances are a wonderful way to train kids to be financially literate.” Kids who did the worst on financial literacy tests were the ones who received an unconditional allowance. Interestingly, the next highest were kids who did chores for money, with the highest financial literacy scores coming from those who didn’t have an allowance.

Mandell explains that rather than using allowances as instruments for teachable moments, some parents employ them as a way of avoiding the money subject altogether.

According to most money experts, the bottom line is that if you do allowance poorly, you’re setting your kids up to be worst off than if you didn’t offer allowances at all.