At some point in every parent’s life, there comes a time when it is impossible to avoid confronting the “A” word.
That’s right. I’m talking about whether or not to give your child an allowance.
Allowances are powerful things. They are a child’s first exposure to the power of personal choice that financial means can bring. It is for this very reason that parents approach it with a mixture of fear and trepidation. To some, it is the quintessential way to teach children financial literacy as well as character traits like patience, thrift and generosity. To others, however, allowances are dangerous things that take away parental power and authority, and teach nothing more than greed.
According to Ron Lieber, a personal finance writer for The New York Times, there are three basic ways that parents approach this question.
No chores necessary. Children are simply given money (usually weekly) and are either free to do what they want with it, or they must allocate it in specific ways. Lieber gives his seven year old daughter $3 weekly, but she is free to spend only $1. Of the remaining $2, one must go into a savings jar and the other must go into a “give jar for a cause of her own choosing." "She spends a lot of time thinking about that," Lieber told NPR.
The upside of this approach is that it teaches children to think carefully about how money is spent. The downside is that it teaches them that money comes from an authority as a gift. And the amount one receives is dependent solely on the generosity of that authority, not on what one actually does to earn or create that wealth.
No allowance at all. The second popular choice is to not give allowance at all, but to take a “communal sharing” approach. The idea here is that we are all part of the same family, and we should all contribute what we can to the common good, cheerfully pitching in to do chores simply because the family needs them done. Some parents sweeten this by covering all their children’s needs but allowing them to present an argument or sales pitch to persuade their parents to buy something they want.
The upside of this is that children learn that there is some value to work other than the financial reward it brings, and that contributing to a common good can be its own reward. The sweetener also teaches them how to be persuasive. The downside is that it teaches them little about financial responsibility, and even less about how to create their own wealth. The sweetener can also teach them to be annoyingly argumentative.
No free money. A third popular choice is "to link allowance to the performance of chores." "The thinking here," Lieber explained to NPR, "is that 'Nobody gets free money in the world and neither should my kids and that would spoil them.'"
The upside of this is that children learn a sense of empowerment—that the amount of money they have in their pockets is up to them and their willingness to work hard. The downside is that if your children may decide they’d rather not do the chores even if it means foregoing their allowance. This is especially true if all of their needs are otherwise taken care of by their parents, and allowance is just the icing on the cake.
Parents choose one of these approaches because they assume it will shape their children into successful adults. After all, children’s first and most striking experience with money is how it is handled in their families. And as any teacher or employer will tell you, students and employees often project family dynamics into their relationships with their employers and coworkers.
So as a college professor and a small business owner, I find myself reflecting on the types of students and employees I’ve encountered and whether their attitudes toward school and work can be traced back to these approaches. There is the student who argues incessantly for an A in the course because “I really need one to stay on the Dean’s list”, or the employee who demands a raise because “the bank just raised my mortgage payment”. The underlying belief in these demands seems to fit the “no allowance with sweetener”: They don’t see a connection between their performance and the grade or wages they receive. Instead, their implicit belief seems to be that the professor or employer has unilateral authority to bestow grades or wages, and getting what you want depends solely on convincing them to give you what you want. The connection between performance and outcome seems to be completely lacking.
Then there is the student or employee who behaves as though they deserve a passing grade or a paycheck simply for showing up. Once enrolled or hired, they believe they are now “part of the family”, and the parental authority in the main office or at the front of the classroom will give them what they need simply for showing up. This seems to my mind strikingly similar to the “no chores necessary” approach to allowance.
Finally, there are the students or employees who fully appreciate the causal relationship between hard work and performance, and between performance and grades or remuneration. These are the students who don’t believe they are entitled to anything just because they belong to the class or because they show up more often than not. If they want a better grade, they ask what they can do to improve their performance in the class. If they want more money, they ask for overtime, or put in extra effort to improve the efficiency of the business so that it will be more profitable. I don’t know about you, but this is the kind of adult I wanted my children to be.
To my surprise, a careful search of the scientific literature on child development returned only twenty published studies since 1930, and only eight of those were published since 1990. Of those eight, only one stood out as having useful information because it reported actual spending behavior rather than self-reports on attitudes toward money or the like.
In 1991, researchers Rona Abramovitch, Jonathan Freedman, and Patricia Pliner published a study in which 60 girls and 60 boys aged 6-10 years were given either $4 in cash or $4 in credit to purchase items in a store. The amount that they did not spend in credit would be given to them in cash. They found that children who did NOT receive allowances at home spent more when they received store credit than when they received cash, while those who got allowances spent the same amount whether they were given cash or a credit card. Neither age nor any other background variables affected the amount spent. I found this striking—receiving an allowance did indeed impact children’s financial responsibility, even at this young age.
So here is what my husband and I decided to do when our children reached the age of seven, and we could no longer avoid the “A” issue.
There were a set of basic chores that were their responsibility, and there was no negotiating on those. But they received an allowance of $10 for doing them. There was also an “optional chore list” on the refrigerator, with monetary values (e.g., empty the waste baskets - $1). They were to keep track of the additional chores they did and their monetary values. On Saturdays, we played “bank” at the kitchen table. They gave me an “invoice” with the chores they’d done, and added up what they were owed. Half of that money went into a savings account—an Excel file in which I recorded the amount they deposited and for which we paid them 5% interest compounded daily. (This is what I earned as a kid when the banks actually paid enough interest to incentivize savings.) The other half was theirs to spend as they wanted. I counted out money, asked for change when I had bills too large to break, and sometimes pretended to make mistakes. Their job was to make sure it was all done right—that they didn’t receive more or less than they’d earned. This taught them that they had the power to create their own wealth by seeing opportunities to provide service, and that it was important to be honest. When they entered high school, the amount they’d saved went into certificates of deposit.
Did this work? Well, we had precious few arguments about money. When they wanted to buy a toy, they saved up or pooled their money to buy it rather than haranguing us to get it for them. They grew up into the kind of student and employee who works hard and succeeds. They are now in their twenties, and are financially responsible.
But even back when they were young children, I knew it was a good plan when I overheard my older daughter say this to her younger sister while standing in the toy aisle in Target:
“That Barbie costs $15. We have to use all of our money to buy her, and we’re probably only going to play with her twice and then just put her in the closet. I don’t want to waste my money, and neither should you. Let’s buy something else we’ll play with longer.”
I rest my case.
Dr. Denise Cummins is a Fellow of the Association for Psychological Science and the author of Good Thinking: Seven Powerful Ideas That Influence the Way We Think. More information about her can be found at www.denisecummins.com.