If you talk with a group of people about money for more than two minutes someone is going to unleash one of the most common financial phrases on the planet: I wish they would have taught this stuff in school.
When it comes to giving children an allowance, you might believe that all experts agree it’s the right thing to do — but that’s not actually the case. Believe it or not, some experts believe that more damage can be done by giving allowance the wrong way than by not giving it at all.
To help you make the right choice when it comes to your own kids, we decided to ask one pro-allowance expert and one anti-allowance expert for their input.
Read their responses and see what you think.
The Expert: Neale Godfrey, personal finance expert and author of 27 books and financial literacy lessons for kids
CREDIT.COM: For starters, what would you say the main goal of giving an allowance should be?
GODFREY: Kids need to learn the natural consequences of money and that the only way you get money is to earn it. So that’s the first part of why allowance is important—understanding that the way you get money is to earn it. The other part is about teaching them to budget.
CREDIT.COM: How do you suggest parents go about setting up an allowance system?
GODFREY: I recommend setting up two types of chores in your house: citizen-of-the-household chores and work-for-pay chores. Kids don’t get paid for citizen-of-the-household chores. These are just meant to teach your kids to be good citizens of the house, and hopefully later of their communities. For example, in our house we recycled and my kids kept their rooms clean, and they didn’t get paid for those. On the other hand, work-for-pay, to me, are things like setting the table, loading the dishwasher, dusting, vacuuming, and doing laundry. But you are the CEO of your household, so you decide what are citizen of the household chores and what are work-for-pay chores.
CREDIT.COM: Where does the budget part come into play?
GODFREY: Parents should make this very visual and give young kids four clear plastic envelopes or jars to divide their money into. They can teach them that 10% comes off the top for charity and then divide the rest into thirds. The first 1/3 is quick cash (so you teach that if you work hard, it’s okay to spend a little bit of your money on things you want), the next 1/3 is medium-term savings (help them pick something to save for), and the last 1/3 is long-term savings. Parents should go to a bank and open an account and teach their kids about how real money goes into that.
CREDIT.COM: Any final thoughts when it comes to allowance?
GODFREY: Talking to your kids about allowance and money is just as important as giving it. I don’t support an entitlement program, but I believe you should give a set amount each week for chores so you can begin to teach them how to use it.
Anti-allowance (to a degree)
The Expert: Dr. Lewis Mandell, professor of finance and managerial economics and dean emeritus, State University of New York at Buffalo
CREDIT.COM: Where does your stance on allowance stem from?
MANDELL: In the 2001 National Jump$tart Survey of U.S. High School Seniors, students were asked to describe the allowance that they received when growing up. Those who received regular, unconditional allowance had the lowest score in the test of financial literacy, scoring, on average, just 48.9%. Those who were given money by their parents as needed scored highest at 51.9%, followed closely by those who received their allowance upon completion of specified chores at 51.6%. To shed some light on the surprising results, students were also asked about the frequency with which they discussed money matters with their parents. Those who said “never” scored just 42.5% on the test, while others had scores that were about 10% higher.
CREDIT.COM: So it stands to reason that talking with your kids about money is maybe just as important as giving an allowance, then?
MANDELL: Prior studies on the subject of allowances showed that giving a regular, unconditional allowance allowed the parents to minimize the interaction with their children. However, it is just this interaction that appears to be the factor most closely related to the financial literacy of their children.
CREDIT.COM: What should a parent’s main takeaway be from your opinion on allowance?
MANDELL: As long as giving an allowance does not diminish the financial interaction between parent and child, there’s nothing wrong with it. However, that is why giving children money as requested seems to be better than an allowance—at least the parent gets to learn how the child intends to spend it and can intervene, where appropriate.
In the end, deciding whether or not to give an allowance to a child is something each parent has to personally determine. If nothing else, though, both experts agree that keeping the lines of communication open when it comes to money and finances is a key factor in raising a financially independent child.
Teaching your kids good financial sense doesn’t end with allowance, though. Opening a savings account for your child is a great motivator for them to do well financially, too, as is modeling good financial habits. As your children grow, set an example for how to stick to a budget, know about your credit score (which you can check for free on Credit.com), and more. Remember, it’s never too early to instill good spending habits.
This article originally appeared on Credit.com. Cheryl Lock is a writer and editor whose work has appeared in dozens of publications, both in print and online. She was a money editor at Parents magazine before leaving to launch the inaugural parents vertical for the personal finance website Learnvest.
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