Kids who Receive an Allowance have Lower Financial Literacy Scores, says Expert

With the intention of raising smart spenders and money savers, it has been the common idea of parents that by giving their children an allowance, they teach them the concept of budgeting and managing their expenses. Especially since it’s hard-earned money, parents want their kids to know by heart just how valuable wise spending and wise saving is all about.

Giving one’s child an allowance, for instance, has been thought to help teach kids about the importance of responsibly handling money that he can only spend within a certain period. For some parents, they give the allowance as a reward for accomplishing certain tasks or chores. In this way, they teach their kids that money is something that is earned. Other parents, on the other hand, give their children an allowance unconditionally.

But Lewis Mandell, professor emeritus of finance and former dean of business at the State University of New York in Buffalo, begs to differ with this age-old parenting method. In fact, he says it can even hurt them.

Why? How? While kids can get high scores on tests regarding compounded interest and banking fees, if they’re not in a position yet where they can actually practice these concepts, then it seems unlikely that it will transform their behavior or perception of money.

Said Mandell, “After reviewing the literature, I have found that, when given incorrectly, allowance is a terrible idea, across all cultures and time periods. Studies have shown that instead of encouraging good financial habits, giving an allowance is statistically associated with diminished financial literacy, lower levels of motivation and an aversion to work.”

 

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In the 2000 survey by the Jump$tart Coalition for Personal Financial Literacy, it was found that high school students who didn’t receive an allowance got the highest score, an average of 52.5 percent, albeit these were considered a failing grade. Mandell said this is possibly so because kids who don’t get an allowance are forced to talk more openly about finances with their parents, meaning, they would need to justify more the need for certain expenses. 

"Kids have to talk to their parents to get money from them and offer some sort of explanation. 'I need it for car fare or books. I need it to go to the movies,'" says Mandell. "And the parents at least have the ability to interject or even withhold the funding if they don't think it's appropriate."

Surprisingly, those who would receive an allowance got even lower scores, getting an average of 49.1 percent.

One fourth of these students, who would receive an allowance without having to work for it, didn’t want to go to college, and was deemed less likely to hold a paying job.

Allowances per se are not without merit, but there should be sufficient discussion with the parents in order to enlighten their children on how they manage the family expenses. The sad part is that most parents are too busy in these times to sit their kids down to talk about such matters, that the norm is more to provide the allowance without an explanation.

Explained by Mandell, “Allowance systems are effective only when they afford the possibility for discussions about finances within the family, such as why and how families make the financial decisions they do. And even then, the conversations could be effective on their own even without giving over the money. Unfortunately, very few parents today have the time, patience, expertise and willingness to have the correct conversations with kids. So, allowance continues to be mishandled. Given the choice between a mishandled allowance and no allowance, I’d choose no allowance every time.”

 

You may also want to read:

• 5 Important Lessons Young Kids should Learn about Money 

• 3 Ways to Teach your Kids How to Save 

• Teaching Your Big Kid the Concept of Money 

When was the last time you talked about money matters with your kids? What’s your approach? We’d love to know. Let us know by leaving a comment below.

Sources: 

• January 13, 2012. Eileen Ambrose. “Will giving children an allowance make them smarter about finances?” articles.baltimoresun.com 

• February 1, 2012. “The New Science Behind Your Spending Addiction” themoneyacademy.wordpress.com 

• February 15, 2012. Dan Kadlec. “Why Giving Your Kids an Allowance May Not Teach Them Anything” moneyland.time.com 

Photo from sxc.hu