I am often asked by parents whether or not they should give their kids an allowance. Their hope is that this will encourage money management and positive spending habits in their kids. But as every parent knows, the "A" is a loaded question.
When asked, I always try to understand the logic behind the parent's approach to allowance, as the decision is so dependent on the dynamic and financial habits of the family.
Here, I have shown the example of three kids who are in our classes and the approaches their parents have taken. Each of these approaches have their own pros and cons and inculcate a different aspect of money management.
Kayla (age 14) and the Get Allowance and be told How to Spend it: Kayla like all 14 year olds has a wonderful mind of her own. When her parents finally agreed to give her allowance it was under strict conditions on spending and effort needed. Her $60/week allowance has to be equally divided between 3 jars. One for spending, one for charity and one for savings. In return she had to help do the laundry and clean her room.
From every option presented, I think this is the absolute worst way to do it. By forcing your child to divide money you are not teaching them any financial management. Her parents have actually set an example which will impact her for life where she is always dependent on others to tell her how to spend her money. We see this over and over again in our classes. And while their idea of putting $20 towards charity is a noble one, let's get real - which adult do you know that gives 30% of their earnings to charity?
By rewarding her for cleaning her own room and doing her own laundry they are dismissing one of the most basic tenants of money management. You get money for the added value you bring. Cleaning up a mess you made, is not added value it is an expectation for life.
These actions set up a certain expectation and behavior platform that impacts the future. When a child raised in this environment grows up, their expectations of life in the workplace is different. In real life, you do not get paid for cleaning up the mess you made, in fact, it's fair to say that if you don't clean it up you will get fired.
Henry (age 13) and the Allowance just for Being There. Henry's parents give him $40/week. He is not expected to do any work for it, he does not have to spend it in a certain way, he has full autonomy in how he spends it as long as he does not ask for more money.
By giving Henry full independence, his parents are hoping he will learn valuable money lessons by making mistakes. It is fair to say that this hands off approach does put him in full control of money and he has learnt pretty fast how to manage his money to buy him lunch, candy and pay for add-ons on games he plays.
However, where this approach goes all wrong, is when they give money for no reason. By giving him money for simply being there, they are missing a valuable lesson in Henry's financial foundation, in that there is a causal relationship between how much you earn and how hard you work. There is no free money in real life. I have seen this over and over again where a child demands a better grade with no extra work put in, or a team worker demands a raise with no real extra effort put into the work.
Selina (age 14) and No Allowance -Ask for What you Want. This is a common third example I see often. Selina gets no allowance, but if she needs money, she asks her parents and justifies it. Like every example above, this also has pros and cons. By not giving free money, her parents have not put her on a path of expectations that she has a right to free money. By justifying the need for her expenses she is constantly having to sell her ideas and in a way this does give her an ability to better negotiate things in the real world. However, it also limits her because she is never in control of her money and will likely not help her down the line when she has to make real decisions on money.
So, what is a parent to do?
I can only share what my husband and I have chosen to do in our home. This is may not be a good approach for everyone and as I said earlier, each family needs to have their own decision when it comes to allowance and finances in a family.
Chez Nous, we have opted for a model where my daughter works and earns her money. She comes to our shop (not every one has the benefit of having a start up in constant need of cheap labor!) and works and gets paid minimum wages. She is then able to spend this money as she wants, but it needs to last her for all her extra expenses. So far, it has been working and it is teaching her that there is work involved in money. She is often broke at the end of the month and learns by herself how to spend her money. It's fair to say, that the Peach Tea Latte at Starbucks has been axed.
Like everything else regarding money, discussions on allowance in a family need to be made taking into account the dynamics of the entire family.
Teaching kids about Financial Literacy and Money Management is the single most important contribution a parent has towards their success.