1/3/2013 3:45 PM ET|
The best way to dole out allowances
It seems intuitive that paying kids for chores or good grades would help them develop financial smarts, but research doesn't bear that out.
For decades, parents have dutifully paid allowances to their children, often in exchange for chores around the house. Most of the time, they probably think they're passing on the value of hard work and teaching important lessons on how to save and spend. It turns out they're mistaken.
According to new findings, paying children an allowance can do more harm than good when it comes to their future financial literacy skills. According to Lewis Mandell, a professor of finance at the University of Washington who recently studied more than 50 years' worth of allowance research, "The kids who receive (a regular, unconditional) allowance tend to think far less about money in general." 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.
Dollars and drudgery
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, the 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.
Many parents skip regular allowances altogether, which isn't necessarily a bad thing. According to Mandell's review of decades of research, 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. Perhaps that's because they are forced to think about what money is being used for, he says. "The kids who have to ask for the money have higher financial literacy than those who get allowances," says Mandell.
But is there a smarter way to pay children an allowance, so that they learn how to handle money at an early age? Mandell says parents should 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," he adds.
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 the book, including 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.
"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," says Weinstein.
Dan Henderson, who founded the financial education toy line Zillionz, says 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.
Henderson also recommends helping children learn what to do with their allowance by teaching them to apportion it. He suggest children put 30% to spending, 30% to short-term savings for bigger purchases, such as a bike, 30% to long-term savings such as college and 10% to giving.
That's a similar concept to the one promoted by Money Savvy Generation, a company co-founded by former financial-services professional Susan Beacham. She invented a piggy bank with four compartments -- save, spend, donate and invest -- to teach kids how to budget. "You're teaching them to stop, pause and reflect -- and this is the first step toward teaching them to delay gratification," she 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. Henderson says most 3-year-olds are 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.
"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," says Weinstein. Henderson and Weinstein, along with many other financial experts, recommend paying about $1 for every year old the child is, on a monthly or weekly basis.
Weinstein's school-age daughter recently used her allowance to purchase a book. On her way out of the store, she told her mom how happy she was with her purchase. The allowance system, says Weinstein, 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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You mean kids get paid to do things around the house? When I was growing up I thought chores were in exchange for the roof over my head, food in my stomach and clothes on my back.
Kids are now 14, 17 and 20. Allowances started at age 5, $1 times their age per week. 50% to college, 5% to church and the rest was theirs. However, they had to purchase all gifts for friends, family, etc. Also had to spend their own money for entertainment - movies, video games, music, laptops, etc. Allowances stopped at age 16 (old enough to have their own job). In addition, in 7th grade, the girls got a $25 per month clothing allowance. We paid for 1st coat and 1st pair of good tennis shoes, rest was theirs to buy. The youngest, a boy, hates shopping so didn't do this with him. I just buy what he needs. However, he did have to pay toward his club sport cost.
Never once have the kids asked for or received additional funds. They are all savers, goodwill is their friend for clothing, all have part-time jobs during the summer months. 50% of their earnings from their jobs is also saved toward college. The allowance was never linked to work around the house or their grades. The allowance was strictly for me to teach them about money. They have all bought their own CD's (not the music kind) and savings bonds. We talk about inflation, interest rates, the fiscal cliff, their tax returns, etc all the time. We can hold a more intelligent conversation about politics and the economy with them than with some of our friends and colleagues.
All are expected to work around the house, kitchen duty, laundry, cleaning, mowing, etc. All are expected to get good grades.
Personally I agree with the book I read: for children how to become rich, successful and do well in school.
If I have to pay my child to help around the house, I might as well forget about expecting him/her to care for me when I'm old. After all, I will have to pay him to do it. Children need more than an exchange - they need to know why and the purpose behind what needs to be done.
My child wants to be a baseball player.
Their is no way i would rather pay my child to hit the outfield, avoid a strikeout, steal a base.,etc.. Team playing begins at home, everybody chips in
If they are paid an allowance to do something they do not want to do, Welcome to the real world, People work for two reasons,
1) to provide make money,
2) personal satisfaction / be happy ,
Most employees in today's society have neither. It is much more important to teach money management practices/skills (economic survival)
My other child wants to be an artist. want to buy some watercolors, while my wife and I maintain the home chores?
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