Using an Allowance to Send the Right Money Messages
Should I pay my child an allowance? If so, how much should I give and when should I start? A lot of parents ask these questions and wonder if paying an allowance might send the wrong message, like “Wow, I can earn money without having to work!” However, allowances can be set up in all sorts of ways so that the money messages you want to pass on to your kids are reinforced instead of negated.
Usually, a good time to start paying an allowance is when the kids are in grade school. They are then learning the basics of math, love to be involved in family matters, and look to you for guidance. An allowance can be a good way to teach kids self-reliance in budgeting, saving, sharing and even investing.
Our position here at LNWM is that you are NOT missing out if you decide not to pay an allowance. There are many other ways to teach kids about money. But if you do decide on an allowance, realize that the key is implementation and consistency.
We advise parents to answer these five questions first, before paying an allowance:
- WHY are we providing an allowance? (To teach kids how to manage money; to incentivize work, etc.)
- WHAT should the kids do to get the money? (Nothing, for chores, for occasional help, etc.)
- HOW MUCH should we give? (Too high and it’ll feel like an entitlement; too little, it’ll lose impact.)
- WHEN will we give them the money? (Weekly, monthly, etc.)
- HOW will we give them the money (Cash, bank deposit, etc.)
After answering these questions, you’ll then be able to decide which type of allowance works best for your situation. Here are the major options:
#1. The Unconditional Allowance
There are no work requirements for this type of allowance. Giving money unconditionally allows your child to learn how to manage money and practice this regularly. However, a “no-strings-attached” allowance doesn’t result in the good feeling of earning money for doing work. The positive is that when kids do chores, they are doing them because that is expected of all family members, out of duty, obligation and goodwill.
“Giving a child an allowance, particularly a regular, unconditional allowance that the child can depend upon, is a terrible idea.” That’s the researched opinion of Lewis Mandell, Professor of Finance and Managerial Economics and former Dean of Business at SUNY, Buffalo. Mandell reviewed 50 years of research from the U.S., Canada, Europe, and Australia on paying allowances. He found that teenagers who receive a regular unconditional allowance tend to view this as an entitlement.
#2. Earn Money for Chores
Kids “earn” money for doing chores and other tasks, either regularly or as they arise. This is the most popular type of allowance and is solely rewards based. It is an exchange of services for money, similar to the concept of a job. Here, you’re helping kids see the satisfaction that comes with earning money. The downside is that you might feel like you’re paying the kids to do things they should be doing out of duty, obligation and goodwill.
You can modify the “earn money” allowance to encourage independent thinking and entrepreneurship. For instance, you could offer to pay your child something if he/she spots a problem around the house that needs fixing, proposes a fix and then does the fix.
#3. Pay as Needed
Here, the allowance is paid whenever children ask for help to pay for something they need. It can be paid in installments to help kids save up for something big like a tablet or smart phone. This type of allowance lays the groundwork for an ongoing money conversation between you and your child. It allows you to discuss and analyze the pros and cons of each request. Collaboration between you and your child develops. And it could also develop your child’s negotiation skills.
#4. The Hybrid
With this approach, you mix and match elements from the above approaches, and make adjustments as the children get older or their needs change. For instance, you could start out paying an unconditional allowance when the kids are in first grade so they learn to fund their piggybank and basic budgeting (spend/save/share). Then you upgrade to a higher allowance based on the kids doing regular chores around the house.
In junior high, you supplement the allowance with extra money for clothes, electronics, etc. but only if they come to you with a plan and budget. If/when your teens get their first part-time or summer job, celebrate that and suggest they may want to start investing a portion of their combined allowance and income.