Kimberly Palmer, senior editor for US News and World Report and author of Generation Earn (see my review) posted yesterday on the smart way to pay kids an allowance. She drew on statements from several experts who had researched the way children responded to different kinds of exposure to money from their parents.
What I got from the article was that there are benefits and drawbacks to just about any kind of way you want to deal with allowances:
- Giving a regular allowance not tied to chores. The benefit of this method is the regularity, according to Dan Henderson, founder of the financial education toy line Zillionz which includes items like a talking cash register and a savings goal ATM. The drawback is that kids may become slackers since they're not associating money with work. This point comes from Lewis Mandell, finance professor at the University of Washington, after studying 50 years' worth of allowance research.
- Giving allowances tied to chores. This isn't cut-and-dried either. Alisa T. Weinstein, author of Earn It, Learn It: Teach Your Child the Value of Money, Work, and Time Well Spent, says that tying allowances to chores isn't always the best thing because it makes the association that working for money isn't fun. (My comment to this is, “Welcome to the real world, kid! Sometimes you have to do things that aren't fun!”) On the other hand, it avoids the reservation that Mandell has with children not associating money with work.
- Giving nothing at all. This surprised me a bit: Mandell concludes that not giving an allowance at all, but instead having the child ask for money when they want something, tends to increase financial literacy. I'd take it a step further and have children hustle for their money a bit, negotiate, and be entrepreneurial. I can also see it being taken too far; if money is given whenever it's demanded, that can lead to problems as well.
Overall, we're probably not harming our child too much with what we're doing. We do give a regular allowance, we do have her separate out her allowance (10% tithe, 30% savings, 60% spending), and we do give her opportunities for extra money. She is starting to get choosy with how she spends her money, which is a good sign. We also talk to her off and on about what we as parents have to pay for. This is a recommendation of Prof. Mandell as well.
What are your thoughts?
The savings goal atm was a toy that I bought my daughter for christmas (err, I mean Santa brought it:) ).
Anyway, I have to say that the other gifts were a bigger hit thus far for a 7-year old. That said, next weekend I’m going to get it all set up and work toward a system where she can save.
That system will probably be not be tied to doing chores, but will be an automatic allowance. My thinking is that some very basic things should be done anyway – I’m not getting paid to take my plate to the kitchen sink, so why should a kid?
I do like the idea you put out there about having kids “hustle” for their money. I think that it helps them think strategically, works their brain in terms of acquiring money, and is generally a good exercise for them. The ultimate goal is to provide for kids and have them be well-adjusted, self-sufficient adults when older, so this idea is a step towards that direction.
I remember one person saying that they have their kids bid for jobs. Actual negotiations occur. Occasionally one of the kids underbids the other for the job! Now that’s free market!