Giving kids allowance makes a lot of sense as they do things more independently. An allowance can be an opportunity for kids to learn self-reliance in financial decision making, budgeting, saving, and money management – lessons that many grownups have not learned.
Giving kids a modest amount of money makes them realize that they cannot buy everything they want. When kids use their own funds, parents hope that their kids learn to spend wisely, budget, save, and be money-smart.
There are four ways you can give allowance to your kids, each with their advantages and disadvantages: regular allowance, allowance only given when needed, allowance tied to chores, and allowance tied to school grades. Here are the pros and cons of each method, according to experts:
Some financial management experts say that giving a child a regular allowance is the single best learning tool. Some researchers, however, do not think that it is a good idea to simply give a child a regular unconditional allowance.
- A child can learn to plan ahead — to anticipate spending needs and make choices about what’s most important.
- Allows a child to learn to manage his own money and make his own mistakes.
- Parents are also able to budget their money when they plan what they give to their child
- Lewis Mandell, professor emeritus of finance and managerial economics and former dean of business at SUNY, Buffalo, thinks that “giving a child an allowance, particularly a regular, unconditional allowance that the child can depend upon, is a terrible idea.” Mandell reviewed 50 years of literature from the US, Canada, Europe, and Australia on studies made on allowances. He found that teenagers, who receive regular unconditional allowance, tend to view this as an entitlement. He found, without exception, that teenagers who received a regular unconditional allowance have diminished financial literacy, lower levels of motivation and an increased aversion to work.
Allowance Only Given When Needed
Some parents give their kid an allowance only when the child needs the money and asks for it. They decide to give their child money based on how necessary it is and the budget allocated for the child.
- This presents an opportunity for parents to talk to their kid about being smart about money. According to Mandell, “The kids who have to ask for the money have higher financial literacy than those who get (regular) allowances”. This is perhaps because parents talk to kids about money and kids are forced to think about what it is being used for.
- A child who is only given the amount needed for specific spending is not able to learn money management, including budgeting and saving.
Allowance Tied To Chores
Making chores a condition for a kid's allowance is also a top strategy for some parents when it comes to getting their child to help with housework.
- Parents give money to their child anyway, so might as well let the child earn the money by doing his chores properly.
- Giving an allowance for completed chores creates a connection between work and pay.
- When a child earns his allowance, he learns that having money involves work, sometimes hard work that they do not enjoy.
- It undermines the sense of duty to family and it diminishes its purpose as a domestic responsibility. Mandell cited a study done in Australia in 1995 by Warton & Goodnow suggesting that teenagers saw household work as a means to earn pocket money rather than as a way to learn that everyone has to do his or her fair share as a member of the family, learn how to be helpful, and do what needs to be done.
- When a child is asked to do other chores around the house, it is not surprising that he may bargain with his parents and use the ‘chores for cash’ arrangement.
- When a child does not need his allowance for the week like when it is Spring Break or he has extra money, a child may not want to do his chores, and this creates a problem.
Allowance Tied To School Grades
- Giving an allowance for good grades is an incentive for a child to study more.
- When a child earns an allowance from good grades, it creates an association between work and pay. The child learns the value of money, which influences how he handles money.
- Grades today affect one’s college options tomorrow. Some scholarship funds even pay students to maintain a certain Grade Point Average. When a child is successful in his studies, he get a job or qualify for a profession he wants to pursue. This usually leads to his having a good income and financial independence when he becomes an adult.
- The problem with tying an allowance to good grades is that deciding an amount requires some computational work. For example, it could be calculated based on grades, test scores, or some other measures.
- The incentive has to be attainable as well. Parents have to figure out where to place the bar and decide on when to raise the bar. Instead of raising the bar when grades improve, the parents may include other expenses that the child will be responsible for with the added allowance.
Tips for Giving Allowance to Kids:
Here are tips to make the most of giving allowance to your child, so that he learns money management as well as life lessons to make him smart:
- Give allowance to your child when he is old enough to manage it. The right age depends on your child, but normally you can start when he is 6 years old. Your child should be able to understand the concept of money - that $1 is equivalent to ten dimes or four quarters, as well as different stuffs he wants to buy require different money amounts.
- Keep the system simple so you can manage it.
- Whatever way of giving allowance you choose, the most important thing is to be involved and committed to your kids learning financial literacy and developing beneficial habits such as saving, budgeting, and spending responsibly. It requires hard work, discipline, and repetition.
- When you give allowance, discuss with your kid the realities of your family budget, and why you make the decision you do.
- Speak with your child about money and the lessons he should be learning, like the purpose and rules of the allowance. Share your family’s financial constraints so your does not see allowance as an entitlement.
- Decide on how much to give by settling with your child about what the allowance is meant to be spent on. It could be small enough to only cover the incidentals, or it can be broad enough to cover clothes, transportation, food, and even entertainment.
- Be clear as to what you expect your kid to do with his allowance. Communicate to him clearly what spending needs the allowance covers and what you expect him to save.
- Let your kid know the consequences of failing to make his allowance last for the period and/or if he is not able to save.
- A good idea is to start your child with a small allowance. Expand it as your child gets older and learns to manage his money more skillfully. For example, in the beginning, he could be responsible only for his lunch money, but as he grows up, he can manage his spending for clothes, books and other needs.
- Consider requiring your kid to save a certain portion of his allowance for something big that he would want to buy in the future. This makes your kid develop a saving habit.
- Remember that although it is important for you to talk to your child about managing money, it is more important for him to see how YOU manage your money so that he models your behaviors and attitude. Your child will not learn if you tell him to be spendthrift, but he sees you spending a lot of money on non-essentials. Always remember that your child learns more from what you do than from what you say.
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