How do you teach your children about the value of money? Do you give them an allowance if they do all their chores or do well in school? My best friend in grade school used to get a quarter every time he got an “A” on his report card. He graduated as a valedictorian but he doesn’t have a clue about how to manage money.
This can be a touchy subject among parents who all seem to have their own answer. Meanwhile, our children are growing up and going to college and then coming home and moving back in because they can’t afford their own apartments.
So if it turns out we’re all wrong, what’s a parent to do? Fortunately, Kimberly Palmer, writing for U.S. News and World Report tracked down Lewis Mandell, a professor of finance for the University of Washington who recently studied more than 50 years of research into the subject of “allowance.”
And guess what he found out? Paying children an allowance can do more harm than good when it comes to their future financial literacy skills. According to Palmer Mandell discovered that kids who receive a regular, unconditional allowance tend to think far less about money in general. In fact, she adds, he learned that those children appear more likely to grow up to be "slackers," since they aren't learning to associate work with money.
Alisa T. Weinstein, author of Earn It, Learn It: Teach Your Child the Value of Money, Work, and Time Well Spent, says paying children for chores around the house can also lead to problems, because it teaches them that working for money isn't fun. She also warns that 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.
Palmer says that Mandell's review of decades of research revealed that children who have to ask their parents for money each time they need it, whether it's for clothes or lunch, tend to fare better with money later in life. She says perhaps that’s because they are forced to think about what money is being used for. And she quotes Mandell as saying "The kids who have to ask for the money have higher financial literacy than those who get allowances." .
According to Palmer, Mandell says parents should talk about family finances with their children when they pay an allowance. She quotes him as saying an "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. Most parents don't want to do it because they don't have much time."
Dan Henderson, founder of the financial education toy line Zillionz, is quoted by Palmer as saying, “consistency is one of the most important aspects of an allowance. Sticking with a regular schedule, whether it's weekly or monthly, lets children plan for and anticipate their ‘income,’ and also sends the message that it's important to uphold financial commitments.”
She says Henderson also recommends helping children learn what to do with their allowance by teaching them to dedicate a portion (30 percent) to spending, 30 percent to short-term savings for bigger purchases such as a bike, 30 percent to long-term savings such as college, and 10 percent to giving.
According to Palmer, that's a similar concept to the one promoted by Money Savvy Generation, a company co-founded by former financial services professional Susan Beacham. Palmer says she invented a piggy bank with four compartments: save, spend, donate, and invest—to teach kids how to budget. She quotes Beacham as saying, "You're teaching them to stop, pause, and reflect, and this is the first step toward teaching them to delay gratification."
As for how much to pay children and when to begin, Palmer says it depends on each family, as long as they agree on some general guidelines. She quotes Henderson as saying most three-year-olds will be interested in learning about money, and that interest deepens as they get older, so starting conversations and even a regular allowance early can be helpful.
Weinstein says that as soon as a child is past the toddler stage, they recognize that it costs money to pay for things, which can be as early as four. That probably a good time to start. According to Palmer, Weinstein and Henderson along with many other financial experts recommend paying $1 for every year old the child is and pay them on a monthly or weekly basis.