Many parents are befuddled by allowances.
Some are inconsistent about when and how to give their kids money. Others wonder if allowances should be tied to chores. Even how money is doled out can be a problem. Cash is easiest, but much of what kids want to buy — downloads of a favorite show, a toy on Amazon, a realm in Minecraft — requires plastic or other forms of electronic payment.
Research indicates that parents’ behavior — the example they set — and the discussions they have with their kids about money are very important in shaping future financial health for children.
Watching what you do
One 2015 study for the Consumer Financial Protection Bureau, which reviewed research in developmental psychology, education and consumer science, found parents were “critical” in fostering financial well-being in children.
It’s not necessary to be money experts to talk about the importance of delayed gratification or the difference between wants and needs, according to report researcher Elizabeth Odders-White, an associate finance professor at the University of Wisconsin, Madison.
“You don’t have to sit down and do some crazy complex financial calculations with your kids,” said Odders-White. “You just need to talk about the decisions you’re already making. ‘We need to buy this, we want to buy that.’”
Your financial behavior counts, too. A recent T. Rowe Price survey found that when parents had at least three types of savings accounts — for example, an emergency fund, a college fund and a retirement account — their kids were:
- More likely to have savings of their own
- Less likely to spend money as soon as they got it
- Less likely to have lied to their parents about how they spent money
On the flip side, parents who had more than $5,000 in credit card debt were more likely to have kids who spent money as soon as they received it. Their kids also were more likely to expect their parents to buy them what they wanted.
It’s the conversation, not the cash
Allowances, by contrast, seem to be a much less effective tool for teaching positive financial behaviors. Unconditional allowances — those not tied to chores — may be the worst.
Chores certainly contribute to a child’s character development and future career success, according to various studies by Harvard University and the University of Minnesota. Some child behavior experts say chores should be unpaid to teach the importance of contributing to the family.
But financial literacy expert Lewis Mandell has found in his own studies and reviews of others’ research that kids who receive no-strings allowances knew much less than others about saving, spending and credit, and they had a worse work ethic.
The value in an allowance comes from the interaction between parent and child about financial matters, Mandell said. When paying for chores, the parent has to monitor whether the work gets done, and the payment (or lack of it) is a type of feedback. When there’s no allowance, the child has to initiate and justify requests for cash, which leads to a money discussion. Mandell also said without those interactions, the allowance becomes an entitlement that implies money doesn’t have to be earned or managed.
If you give your kids an allowance, explain the rules (such as “when it’s gone, it’s gone”) and ask what they’re learning (“Are you happy with what you bought?” or “What do you want to save up to buy next?”). If you decide against an allowance — or forget to hand it out half the time — you should still talk about saving, making choices and planning for the future.
To get your kids started on the path to smart saving practices, open a Tomorrow’s Tycoons account from First Internet Bank. Call a Relationship Banker at 1-888-873-3424 with any questions.
Guest author, NerdWallet
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