Jan 21,2020

Teaching Money Management to Kids: The Great Allowance Debate

“If you don’t teach your kids how to manage money, somebody else will. And that’s not a risk you want to take” – that is probably the quote that is brought up most often when talking about the importance of financial literacy for young people. And while everyone seems to agree that teaching the value of money to children is crucial, there are still so many questions left to discuss: Is it a good idea for parents to give weekly allowance to the kids? (and if so, how much?) Should older kids be encouraged to make extra money? At what age is it appropriate for children to get their first bank account?

Today we will look at the big, important and scary issue which is known as – THE GREAT ALLOWANCE DEBATE.  But before we even start the discussion, let’s set one thing clear – there is usually no one right answer when it comes to parenting. And teaching money management to kids is no different. Okay, now we can begin.

So, what is interesting about the great allowance debate is that there are lot more different approaches here that one would’ve thought. The first idea is obviously to give children fixed allowance at a specific time regardless of their grades or chores they did. This way kids know exactly when they are getting the money and that should help them to learn simple budgeting and teach them financial responsibility.

The other approach is what some bloggers call “commission system” – this is when kids get money according to the work they’ve done (chores and/or getting good grades). The positive side of this approach is that kids not only learn how to properly spend their money but also possibly can learn to appreciate money more as they realize that money doesn’t come from nothing. One of the downsides here is that kids might lose their intrinsic motivation to study or do housework that they could have had otherwise.

The third approach is to give nothing. This approach has been brought into discussion by Lewis Mandell who suggests that children who receive zero allowance from parents may actually have better financial literacy as a result. Some supporters of “give nothing” approach say that giving kids allowance in any way – be it a commission system or fixed allowance system – may result in children turning into hungry “money-monsters” who are in fact taught more about consumerism than money management.

But this is not all of it. Some parents may also combine methods – for instance, they may give children fixed allowance every week but in case children do some extra work (for instance, fixing the fence or getting a reward at school) – they may receive additional money. Other parents may also give money to the kids whenever children ask (this is probably the most questionable method but may also work provided kids already have internalized sense of financial responsibility).

I don’t know about you, but to me this does look a little bit overwhelming – they are lots of approaches and all of them have some point. When looking at the literature, it does seem that there is some evidence supporting various views but there was one thing that I managed to find in common between different approaches – and that is the importance of talking to the kids about money and explaining how to use it wisely instead of just giving allowance no questions asked.

Gina & George Plytas in their book “Kids get rich: Teaching Children the Secrets to Wealth and Success” have emphasized several times the importance of having money management discussions at home as it gives children the opportunity to ask questions and learn from parents’ experiences.

So, whether you choose to give money to the kids at a fixed time, as a commission or in any other way – the important thing is to have financial discussions with children and not to keep money as something mysterious for kids. If you decide to give them money in some form, it’s a good idea to encourage children to explore several aspects of money management – spending, saving and giving. As the kids get older, learning about compound interest and slowly getting into investing may also be an incredibly useful step in financial education.

In conclusion, did we find an answer to the Great Allowance Debate? Probably not. But as we know, good books leave the reader with something to think about and something to decide for themselves – well, so does this article. Choosing one approach, developing it, adjusting to children’s needs and not being afraid to try something new – this seems to be a pretty good recipe for success.


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