It’s a right of early-childhood passage. To most people, kids and allowances go together like fireworks and the Fourth of July. The most-cited reason is to teach children how to manage money. But is an allowance the best way to teach children to spend and save wisely?
Well, that depends.
What does an allowance really teach us?
An allowance doesn’t necessarily educate children about money management, according to Lewis Mandell, a Professor of Finance at the University of Washington. He studied more than 50 years of research on allowances, and came to some interesting conclusions.
Mandell says the studies reveal that giving an allowance is statistically associated with lower levels of financial literacy, reduced motivation, and an aversion to work — the exact opposite of what parents want as a result of an allowance.
Where can allowances go wrong? As it turns out, it isn’t the allowances themselves that are to blame. Unfortunately, it’s the way some parents use them.
Conversation is critical
On their own, allowances — especially unconditional allowances not tied to chores or other responsibilities — don’t teach kids much about money. After delving deeper into the allowance question, Mandell found that many parents hand over money but don’t take the time to talk with their kids about finances. And that, he believes, is the sticking point.
The most important part of teaching kids about money — with or without an allowance — is having an open and frank conversation. These tips will help:
- Keep it simple. Kids don’t need to know about the intricacies of the stock market. Start with the basics, like the importance of saving. And keep it age appropriate. If your older teen wants to know how to divide money between stocks and bonds, that’s great. Just make sure to cover the fundamentals first.
- If they get an allowance, tell them why. Explain that they’re getting the allowance in part to help them learn how to manage their money.
- Ask questions. Questions can help kick-start conversations about money. For instance, ask your children if they’re saving up for something big, or if there’s a charity to which they’d like to donate.
- Look for teachable moments. If your child asks why she can’t have $20 to go to the mall or why you won’t buy the latest must-have item, take a few minutes to explain. It doesn’t have to turn into a lecture, but you can talk a little about budgets and the need to make smart choices with money.
So the moral is, allowances do work, and can be effective when they’re part of a larger discussion. Whether you provide them on a weekly or monthly basis, they can be a teachable moment that establishes a foundation for your child’s future financial responsibility.
Principal Funds are distributed by Principal Funds Distributor, Inc.