Money Mic: Why Allowance Does More Harm Than Good

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In our LV Moms Money Mic series, we hand over the podium to people with controversial views about money and parenthood. These views are theirs, not ours, but we look forward to opening up the floor for discussion. 

In the past, we introduced you to two writers who shared their differing views on whether it makes sense—emotionally and financially—to go back to work after having kids. One mom was a proponent of staying home after having kids, while the other explained how going back to work after having her daughter helped her keep her sanity.

In this post, Lewis Mandell, Ph.D., professor emeritus of finance and managerial economics and former dean of business at SUNY, Buffalo, explains why he believes giving an allowance can do more harm than good.

Experts will tell you that giving an allowance is a good idea. It makes a lot of sense … on the surface. But when push comes to shove, allowance is a very tricky area for parents to navigate. In my opinion, doing a less than perfect job can do more harm than not trying in the first place.

Here’s why.

Generally, there are two ways to give kids an allowance: an allowance tied to chores, or an unconditional sum of money doled out each week, or month.

When an allowance is tied to chores, a kid is, in a sense, being “paid” for doing housework. In most cases, if he refuses to do his chores, he won’t get his allowance.

When an allowance is unconditional, kids receive the money no matter what. Interestingly enough, the majority of parenting experts recommend giving an allowance unconditionally and not tying it to work around the house.

The argument goes like this: Kids are expected to do certain chores as members of the family. Those chores should be completed without having a dollar amount attached to them. They are simply expected. Meanwhile, kids need spending money as they grow older and do more things by themselves. A regular allowance is supposed to teach budgeting, responsibility, financial literacy and beneficial habits like saving and debt avoidance. 

However …

After reviewing the literature, I have found that, when given incorrectly, allowance is a terrible idea, across all cultures and time periods. 

Why Allowance Can Be Harmful to Your Child

Studies have shown that instead of encouraging good financial habits, giving an allowance is statistically associated with diminished financial literacy, lower levels of motivation and an aversion to work.

According to the 2000 Jumpstart Coalition survey “Improving Financial Literacy—What Schools and Parents Can and Cannot Do,” 35% of the total respondents, American high school seniors, received an allowance based on chores, and 10.5% received an unconditional allowance.

Those who received no allowance had the highest mean financial literacy score of 52.5%. Those who received an allowance dependent on chores followed closely, at 52.1%.

How Are You Teaching Your Kid About Money?

Do you give your child an allowance? If you do, is it tied to her chores?
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But those who received an unconditional allowance—in other words, those children who parenting experts say should have the best money habits—had the lowest rates of financial literacy (49.1%).

Specifically, children who received an unconditional allowance knew much less than others about saving, spending and credit. They also tended to have a poorer work ethic: In the U.S., a study of 1,090 ninth grade students found that students who reported receiving a regular unconditional allowance in the ninth grade were less likely than other students to view work as a source of intrinsic satisfaction.

The ‘Right’ Way to Do Allowance

Perhaps the reason children who received an unconditional allowance scored so low is because it is much easier to just give kids money than to train or educate them about it. Parental involvement in, and commitment to, an allowance system is essential.

I think that allowance tied to chores is better than an unconditional one, but even that isn’t the answer. After all, remember that children who received no allowance at all still scored better than those who received one that was tied to chores.

French author D. Lassarre wrote that the best strategy is to give allowances along with discussions of the family budget. According to him, allowance systems are effective only when they afford the possibility for discussions about finances within the family, such as why and how families make the financial decisions they do. And even then, the conversations could be effective on their own even without giving over the money.

Unfortunately, very few parents today (even the well-meaning ones!) have the time, patience, expertise and willingness to have the correct conversations with kids. So, allowance continues to be mishandled. Given the choice between a mishandled allowance and no allowance, I’d choose no allowance every time.

To sum up:

  1. Allowance in general does not appear to lead to increased savings or financial literacy. Children who receive unconditional allowances appear to be less financially literate than those who receive no allowance at all.
  2. If you do give an allowance, it should be linked to household chores. Speak with your children about money and the lessons they should be learning, like the purpose and rules of the allowance. Share your family’s financial constraints so your children don’t see allowance as an entitlement.
  3. If you do allowance poorly, you’re setting your kids to be worse off than if you didn’t do it at all.

Although allowance isn’t necessarily evil by nature, it can hurt your children unless you do it the right way. Since this requires such a delicate hand, my opinion is that it’s just not worth the potential downside. The statistics speak for themselves.

Dr. Lewis Mandell is a financial economist who specializes in the financial literacy of young people. The author of 21 books, he is Professor Emeritus of Finance and Managerial Economics at the University at Buffalo, where he also served as Dean of the School of Management.

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  • Andrea

    This is interesting, thank you — how do you suggest, as a child gets older, helping them figure out budgeting for their wardrobes, or school supplies, or sports gear, etc.? Should parents just buy only the basics and as soon as a kid is old enough, motivate them to get a job if they want “extras” of any sort? 

    • Jen

      What my parents basically did, was when I was old enough to understand (starting about middle school) once a year or so they would add something that I had to budget for. For instance, they would say, this is how much money we have in our budget to spend on your school supplies, field trips, etc- now we are going to give you that much money, and you have to budget to make it last all year. If you don’t you will have to make do, or forego going out with friends, or get a job. 

      • http://www.famzoo.com/ Bill Dwight @FamZoo

        Bravo Andrea and Jen!

        If parents would just think of an allowance as a budget/constraint geared largely toward “needs” instead of an entitlement for frivolous “wants” and administer it that way to their kids, then it would prove to be an invaluable training tool for good personal finance skills.Whether an allowance is “good” or “bad” depends entirely upon how it is used with your kids. I’m shocked that Mandell continues to miss (or perhaps ignore?) the budget angle altogether and focus on the other hot-button topic of chore linkage. People have certainly raised the benefits of the budget angle repeatedly over the years as this story continues to resurface around the web.Budgeting and expense tracking are undeniably good skills for kids to understand and practice as early as possible – skills they’ll need in order to thrive on their own in the real world. Let’s give the parents the direction they need to be solid personal finance mentors to their kids.

  • http://www.facebook.com/angelacb Angela Hawkins

    This is an interesting article. My husband and I don’t have children yet but are actively trying to conceive. We both believe that teaching our future children financial literacy is critical, but don’t have any experience doing so. Any suggestions on sites or books to read that show parents (or future parents) how to teach financial literacy to their children?

  • http://pulse.yahoo.com/_HCVYFQZB23M4RFD3VSJK52EKTI Tannia

    I have a 3 and 4 yr old.  My husband and I did the Dave Ramsey class, very helpful to get us working together on our finances.  We use the same budget plan for our kids.  They know now if they want something, they need to Save Their Money.  That would be birthday, Christmas money.  I also started them on the ThreeJars, to teach them they have money to spend,save and give.  Thank you for an interesting article.

  • Caroline

    I agree with Tannia — we do use and allowance along with lots of financial literacy discussions. My children are very industrious and the allowance is a great economic incentive to get them working! 

  • Jen

    2% difference in financial literacy isn’t statistically significant- my takeaway from those numbers is that only half of high school students are moderately financially literate, which is scary enough, and that allowance makes virtually no difference on a person’s financial literacy. My parents gave me an unconditional allowance right up through college, and tied other privileges to chores instead. In high school I was one of the most financially literate kids I knew. That’s because my parents regularly reviewed my allowance and my budget a few times a year- I had to show them a budget with what I thought I should have money to spend on, starting at 8 years old! If I wanted a “raise”, I had to show my budget, and make a case for why I should get it- and sometimes it worked, sometimes it didn’t. I was also required to show bank statements proving I was saving a certain portion of my allowance, and until high school, I had to get their permission and justify anything I wanted to use those savings for. As I got older, they gradually added more “needs” to what I was expected to budget for, like clothing, school supplies, etc. By the end of high school I was paying for everything except a roof over my head and groceries at home- but if I wanted something “special” that wasn’t on the normal grocery list, I had to pay for that too. And, anything I wanted beyond what they considered a reasonable allowance, I had to work for at a paid job. Once I started a paid job, they helped me set up my first IRA at 16 too, and to fill out my own taxes. All of that attention to my management of my allowance was what taught me to be financially literate. 

    • chulainna

      Agreed! My parents gave an unconditional allowance and required that 20% went into long term savings and 20% went into short term savings. Chores were just expected, but we could earn more money by doing extra work, like painting the house or picking up rocks in the yard. I have a very good concept of money and saving because of that. Clothes and necessities eventually came out of the allowance as well, via a separate clothing budget. It was up to us to choose whether to buy one pair of designer jeans, or an entire wardrobe at Target. I think it was a fabulous structure and gave me a great foundation. I loathe the idea of paying family members to do chores!

  • Anonymous

    Hi guys! Love the conversation this Money Mic is generating—thanks for
    sharing all your views! Some of you are asking great questions, too,
    and I think we have some other stories that might be able to help you
    out:

    Check out this piece for our favorite tools that help teach kids about money: http://su.pr/5gJTjm

    Read this story about spoiling for ideas on how to set parameters for what your kid spends her own money on: http://su.pr/75ezry

    Happy reading!

  • ErinNC

    When my husband was younger, he was given an allowance and also received $1,000 each Christmas from his parents.  My family was dirt poor and I occasionally would get money for helping my dad in his auto body garage with big dirty projects, like sanding dump trucks on Saturday morning, but never got an allowance.  Chores were expected, not rewarded.

    Years later, my husband still spends way too much money on frivolous things, goes over budget, and often overdraws on his personal account.  (I refuse to comingle our fun money funds with our bills fund because of this.) 

    I really think that no allowance is the way to go!  I have much better financial literacy and spending habits because when I did earn money at my first real job, I appreciated it and used it for necessities.

    • kazeldya

      I think it’s more about what you’re taught about money and what you’re expected to do with your money. I had an allowance but was always taught how to save money, and most of my money went into savings. I started baby-sitting at 13, more at 14, and my allowance stayed but didn’t go up in amount, and the allowance went away when I turned 18. I worked through college and took out some loans but not as much as I needed because I worked a lot. My husband went to a less expense college and has bigger loans that we’re still paying down now. He did not have an allowance as a child. Both of us were raised by single moms and were pretty poor as kids, but now he’ll go to his mom (who really can’t afford to give us money) with something he wants or needs, whereas I’ll figure out what we can cut in our budget or if the item is important enough or not at the time… so it’s not all about allowance…

  • http://twitter.com/Maevearie Jaimi A

     This seems a little obvious to me. If you don’t talk to your children about money they aren’t going to learn about it.

  • Amy

    I agree, for the most part. The strategy of making chores unlinked to money teaches a child that as a family member they are expected to pitch in. While having an unconditional allowance does give children a skewed sense of entitlement if not given with discussions.

    However, I noticed that by blending and balancing these approaches one helps a child understand real life expectations. Have a set amount that they get unconditionally (but set it low), have chores that are always expected of them that are not linked to that amount, and then have “odd jobs” around the house that the child can be compensated for if they choose to put in the work; and of course discussions with all of those.

    If done properly, it will allow a child to learn how to budget with a regular “income”, it will teach them that as a part of the family they should do their part, and show them that doing extra work is rewarding, gives options for saving and enables them to get the things they want without picking up too much entitlement.

  • Leslie Scott

    Practically if we see then the allowances are nothing but the expenses in terms of the financial strategy. And even that can go ahead to cause more harm only with the improper management of the financial structure. Most of the companies give away the allowances to their employees upon their performance and the capability. And performance is based on how the company gets profitable with the performance of the employees. With certain sort of mismanagement as well the allowances flows unprecedentedly with the mismanagement.

    An automated tool basically can sort out the problem in the case as such. In our company we have opted to go with the cloud based solution from Replicon ( http://www.replicon.com/olp/expense-reports.aspx ). expense reports made out of this particular software makes every single sort of the employee expense on cloud that can be accessed by the senior officials who are concerned about the same. Even the risk of fraud also gets minimized with the usage of the same.