Allowances seem like a relatively easy way to teach kids some basic lessons in financial literacy. If you give them a small amount of cash each week, perhaps in exchange for completing a chore, then they can practice saving and budgeting their money. But the traditional allowance might not be the best way to impart those financial lessons, and in fact, some experts argue the practice could be doing more harm than good.
Lewis Mandell, a financial economist with a research specialization in financial literacy, says his review of more than 50 years worth of allowance research found that kids who receive a regular, unconditional allowance tend to think less about money than kids who don’t. In fact, he adds, those children appear more likely to grow up to be “slackers,” since they aren’t learning to associate work with money.
Those conclusions, he cautions, are based on a national survey that now is almost 15 years old, and he points out that economic changes in the interim could affect the impact of allowances. “Since the turn of the millennium, the income of most middle-class families has been stagnant or declining in real terms, and the outlook for the future of their children has definitely suffered,” he says. That could impact the way money is treated within families, with less of an emphasis on immediate gratification. In other words, parents are on stricter budgets now, so they can’t give in to every request.
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“Children who grew up during the Great Depression in the U.S. seldom had overspending problems as adults, and neither did those who grew up in postwar devastation in Europe and Japan,” he adds. Perhaps today’s youth, who came of age during the Great Recession, will similarly grow up to embrace frugality more than their parents.
Parents generally give allowances for two main reasons, Mandell says. Parents might want to use the money to teach kids how to budget and defer immediate gratification, which is a valuable life skill, and they might plan to spend a lot of time imparting this lesson, using the allowance as a tool. But an increasing portion of parents who dole out allowances probably do so because they have little time to spend with their children, he says. “This type of intrafamily monetary transfer is likely to have the opposite effect, setting up an expectation of payment with no learning requirement, causing the type of dependency that could result in ‘slackers,'” he adds.
Mandell says parents in the first group, who give an allowance as part of an educational process, might be helping their kids out, but is more skeptical about the benefit of an allowance in the second (and, he thinks, larger) group. The key, Mandell says, is probably not the type of allowance given, but the type of parent-child interaction that accompanies it.
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Paying children for chores around the house can also lead to problems, because it teaches them that working for money isn’t fun, warns Alisa T. Weinstein, author of “Earn It, Learn It: Teach Your Child the Value of Money, Work, and Time Well Spent . ” Paying for good grades creates a similar problem: Instead of being driven by self-motivation, children learn to work hard just to earn the extra cash.
Mandell says parents should also talk about family finances with their children when they pay an allowance. “Allowance can be used very constructively, but to use it constructively requires time, effort and a degree of honesty on the part of the parent,” he explains. “Most parents don’t want to do it because they don’t have much time.”
Another alternative, and the subject of Weinstein’s book, is to connect the allowance with tasks related to various careers. Children can choose a career — 50 are profiled in her book, including a geologist, travel agent and chef — and then complete tasks related to that career. Travel agent tasks include reporting on a destination in an appealing way, creating a brochure, and for older children, calculating exchange rates.
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“This way, the child is making the connection between effort and money, and the feeling that you worked hard for something. If you can capture that, then you’re much more likely to have a child who grows up and can find emotional and financial fulfillment in their careers,” Weinstein says.
As for how much to pay children and when to begin, experts say it depends on the family, but they agree on some general guidelines. “As soon as a child’s ‘gimmes’ are past the toddler stage, and they recognize that it costs money to pay for things, which can be as early as 4, then it’s a good time to start,” Weinstein says. She suggests paying about $1 for every year old the child is, on a monthly or weekly basis.
Several years ago, when Weinstein’s then-6-year-old daughter used her allowance to purchase a book, she told her mom how happy she was with her purchase on their way out of the story. The allowance system, Weinstein says, let her get “that feeling of working hard for something and now enjoying it,” which was music to her mother’s ears.
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Allowance Advice for Well-Meaning Parents originally appeared on usnews.com
