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.”