Kids and Cash: The problem with allowance

Everyone’s entry into the world of personal income is a little different. As a child, the swaying tides of my financial wellbeing were tied directly to a flimsy piece of computer paper stuck to the front of the refrigerator. The paper was a chore chart, a proto-spreadsheet filled with equally uninspiring tasks like dusting, vacuuming, sweeping, etc. It was a simple roadmap to monetary success – or at least to my meager weekly paycheck.

I don’t remember how much money I made, but I’m sure it was enough.

I’m also sure that by today’s standards it probably wouldn’t have been enough.

Allowance and inflation

According to a recent survey by T. Rowe Price, allowances are on the rise. In the last two years, the percentage of parents giving an allowance of $10 or less has dropped significantly, while the higher payout ranges have all increased. Four percent of parents report giving an allowance of between $41 and $50 per week.

A 2012 survey conducted by the American Institute of CPAs found that the average eldest child made $16.25 a week. That’s $845 for the year. In allowance.

Money for money’s sake

None of that is to say that giving children larger allowances is somehow inherently bad. It’s at least partially a sign of an improving economy. It might also potentially reflect a shift towards putting increased financial independence and decision-making authority into the hands of children.

But there’s evidence that unconditional allowance – a regular stipend that doesn't have to be earned in any way – could be harmful to a child’s financial literacy.

Lewis Mandell, a professor of finance and the former dean of the management school at SUNY Buffalo, studied over 50 years’ worth of research on the impact of allowance on children. He found that the kids who did worst on financial literacy tests tended to be the ones who received unconditional allowance. In Mandell’s view, that population tends to “think far less about money in general."

Child labor

The alternative – making kids work for their money – seems better at first glance, but it’s not perfect and, in some ways, can be equally as damaging.

By monetizing chores or good grades you’re making a very profound correlation for children. The value of helping around the house and doing well in school becomes tied directly to a financial reward.

When I dusted the living room, I did it for a cash reward. I did it only well enough to receive that cash reward. I didn’t much care about the state of the living room (or the dust, for that matter).

Rewarding students with cash for receiving good grades isn’t wrong necessarily, but you do run the risk of alienating your child’s natural inclination towards discovery and understanding. When money is the reward and not the satisfaction of new knowledge, motivations inevitably shift.

I’m not suggesting that you forgo allowance entirely, but your best bet seems to be blending a regular payment with activities and guidelines that lead to an enriched appreciation of money, work, and savings. Some ideas:

Reward your children for developing their interests. Rather than tying allowance to chores, pay your kids for spending time pursuing the things that interest them. Give them tasks or assigned activities that help them develop skills in those areas. It’s more work for you, obviously, but allowing them to focus on the outlets that are intrinsically rewarding to them helps them understand what’s personally fulfilling for them and puts them on the path towards a satisfying career.

Every dollar is earmarked. Put your kids on a simplified budget. Require that they set a certain portion aside for savings and another portion for charity. If the allowance is unconditional, charge them for certain privileges. Set an hourly rate for playing video games or watching television. Make them think about money – where it goes and what you can do with it.

The money is free, but the choices are not. Skip allowance altogether, and replace it with a negotiation system where you give your child money for specific purchases. The purpose is to make every “want” a point of discussion. Simply talking about money in an open and honest way will do wonders for your child’s financial IQ.

There’s no wrong way to handle allowances, but, to the best of your ability, you should be thinking about your child’s relationship with money and considering the messages you’re (possibly unintentionally) sending. Making money an open dialogue is one of the best and easiest things you can do to promote financial literacy in your home.