Kids and Allowance: The Debate that Divides Us

To heck with the fiscal cliff. The financial debate that won't go away is among parents who just want to know if their kids should work for the allowance they receive. The answer isn't always as easy as it may seem.

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In our world of increasing personal financial responsibility, where the social safety net is crumbling and individuals must learn to cope with complex money choices like how to save for retirement and choose the right mortgage, one of the most vigorously debated and polarizing personal finance questions out there is: Should kids have to work for their allowance?

No kidding. This subject generates more interest than the fiscal cliff; it turns out parents, gurus, academics, and financial advisers like old hippies to a Neil Young concert.

In one corner you have financial radio host Dave Ramsey and all-around money guru Suze Orman, who both counsel parents to tie allowance directly to chores. No workee, no payee. They don’t even like the world “allowance.” Ramsey calls it “a commission” and Orman prefers the term “work pay.” Orman, by the way, has no children. That doesn’t mean she can’t have theories, but child rearing often calls for non-prescriptive solutions. Every kid is different. Ramsey is the father of three. Presumably he’s had a hand in raising the youngsters.

(MORE: Are We Watching Another North American Financial Crisis Unfold?)

In another corner you have the godfather of the financial literacy movement, Lewis Mandell, professor emeritus of finance and managerial economics at SUNY Buffalo. Mandell authored the nation’s first prominent financial-literacy scoring system for the JumpStart Coalition for Personal Financial Literacy. He says parents should pay no allowance period—neither as an entitlement nor as a reward for chores.

Parents should simply pay for the things they want their kids to have, in Mandell’s view, which he bases on a study that found kids who received no allowance scored highest on financial literacy tests. That result surprised even him and led to his maverick opinion. Mandell doesn’t have a lot to say about whether allowance is better tied to work or given as an entitlement. Either way, it is helpful as an educational tool only if parents talk with their kids about managing their money.

In a third corner you have those who believe that a base level of allowance should be paid unhinged to chores, but that additional pay to children should be available through odd jobs that go above and beyond what might be considered the responsibility of a good family citizen. You don’t get paid to make your bed or take out the trash. But washing the car and cleaning the gutters might be worth a few extra bucks.

(MORE: Is This The Best Way to Curb Your Kid’s Excessive Spending?)

This third corner is where the more thoughtful parents and pros stand. I put myself there along with folks like Janet Bodnar, personal finance editor at Kiplinger’s; Jean Chatzky, financial editor at the NBC Today Show; and Bill Dwight at family finance website Famzoo.com. The folks I just mentioned have kids and deal with this issue in the real world. We’re not looking for simplistic rules and sound bites, and we understand that there are gray areas in any allowance strategy. You have to be ready to adapt.

As much as I respect Mandell, whom I have interviewed several times, I think his position is off base. I can’t explain why in a study kids who were not paid allowance showed more financial aptitude than those who were paid an allowance. But I know that all the scores were failing and that the test results were similar. The real issue seems to be that parents didn’t talk enough about what the money was for. So the kids didn’t learn anything. That was Mandell’s observation as well. You can’t just say here’s your cash, spend it wisely. Whether kids work for cash or are given it, they don’t know what “wisely” means. The learning is in the discussion and reinforced in their spending decisions.

The basic problem with Ramsey’s view, as I understand it, is that he doesn’t distinguish between working for pay and work that is part of family responsibility. He believes kids only learn the value of money and to appreciate hard work when they must earn what they receive. That’s a fair point. Yet if you pay kids for every little thing they do, as Bodnar has written, they become “little money grubbers who expect to get paid all the time.” And when that happens you have to keep upping the stakes to incent the behavior you want. Orman seems to agree on this point, saying there should be at least a few nonpaying chores.

(MORE: 5 Reasons Your Top Employee Isn’t Happy)

But there’s another problem here, too. The whole point of paying an allowance is to teach your child how to budget and live within their means. If they fail to do their chores (gads!) and don’t receive any money how are you going to teach them to manage it? You might argue, well, they will certainly do their chores next week. But that’s not always the case, as I believe most practicing parents understand. Besides, do you really want to keep track? One study found that 89% of parents assign chores but only 29% made sure the chores got done.

Just over 60% of parents pay an allowance, according to a recent survey by the American Institute of CPAs. Most begin by the age of eight and pay an average of $65 a month. The vast majority tie allowance to chores—89% in this survey, which is the highest I’ve seen and may be linked to the popularity of gurus like Orman and Ramsey. Interestingly, parents are more likely to talk with their kids about manners, eating habits, grades, drugs and alcohol, and the risks of smoking than about managing money wisely. So that critical link—the conversation—is missing. As Dwight noted in an email:

“I find the allowance debate to be a diversion. To me, the far more crucial thing is practice–early and often. It’s critical for parents to make sure their kids get regular hands-on experience making real spending, saving, and giving decisions with a modest, constrained supply of their own income. I don’t think the specific source of that income (unconditional allowance, chores, outside jobs, or a hybrid thereof) is hugely important, as long as it’s thoughtful, consistent, clearly communicated, and in line with the family’s values. My bottom-line advice to parents: Don’t let agonizing over the allowance vs. chores debate get in the way of getting your kids started with hands-on money practice. Pick an approach, get started, and tweak it over time.”

I agree with Bill in this respect: The key to making allowance work is clearly spelling out what the money is for and then standing firm when your child blows the whole amount and asks for more. What’s the right amount? That depends entirely on what your child will be asked to pay for. I like covering the basics and asking the kids to budget for discretionary items. Even a spendthrift teen should always have sneakers; just not Air Jordans.

5 comments
staff
staff

Thanks for the article!

On this allowance note, Parents and Kids can benefit from a foot massage program we put together. It's massagemommysfeet.com, or you can catch our recent tweets under @agonyofdafeet. 

jaybbb
jaybbb

Teaching my kids how to manage and spend their money is always a critical debate at home. I recently discovered http://www.pockiz.com and I believe it's a great solution to our endless discussion with our kids about their money. I give them part of their allowances on pockiz and they manage it, save their money for what they truly want while I can monitor their spendings. While I agree that we as parents have to teach our kids how to manage their money I am trying to give them a little freedom in their spending in order to let them learn how to manage their money. You should probably try Pockiz , for our family it's the best solution to the allowance problem so far !

Rickackerly
Rickackerly

"The whole point of paying an allowance is to teach your child how to budget and live within their means." Not actually, true. There are 3 points.Most input is coming from those with financial expertise; Here’s one educator’s point of view.1) Teaching kids to manage money is not the “whole” point, but just one educational objective. It is a good one, and allowance simply for this purpose is a good one.2) Money for work, teaches a different lesson—and that, too, is a good one. But don’t call it allowance, call it what it is: pay for work—part of the real world. Has nothing to do with being a part of the family.3) There is a third, and more important issue, teaching your child to be a socially responsible member of the community of the family. For this objective, assume (what research shows) which is that children naturally want to do good things to those they love, to members of their clan and family. Build on that by not calling doing things for others or community chores. My three-year-old grandson, for instance, says: “I like to work,” and goes for the rake, or the broom. It is in this context that children should do the dishes, clean up their room, etc. They will want to do this if they are given the respect of assuming that, of course they will want to. What to do when they resist is a tactical issue to be resolved by creative thinking on the parents part. But leave allowance and money out of it.Research also shows that extrinsic rewards undermines internal motivation. And internal motivation is what we are going for.The first two lessons are relatively easily taught, and should be kept out of issues of basic social responsibility. Don’t use the word Chore.

MamaMarlaine
MamaMarlaine

That which we focus on flourishes. Thank you Dan for providing this macro discussion on a critical point for change while others battle over self-manufactured fiscal cliffs. Every societal ill - financial collapse, skyrocketing health care costs, bullying/divorce/wars - has roots in an inferior educational process. It is time to stop calling children names "Spoiled, entitled, bullies, rude etc," acknowledge that life skills benefit from the same passionate educators as academics, and commit to empowering parents with the tools necessary for improved performance. The world changes when we change. Standing ovation to you, and pioneers like Bill Dwight, for being the pragmatic visionaries you are and blazing new trails. Most assuredly paying forward. Hugs!

TimeKeepsTicking
TimeKeepsTicking


@Rickackerly I agree that we have to teach our children how to respect money and let them see the importance of what that money can do for them. It's one thing to let them the spend their money lively, but it's another matter when we show that money can taking responsibly. Every kid is different in how they learn things and their needs and wants, but we must steer our kids as much as possible when they are of age to understand money management and what it does for them...