In her blog “Good Thinking,” research psychologist Denise Cummins explains why the topic of allowances raises such a high level of concern and confusion for parents.

Allowances are powerful things. They are a child’s first exposure to the power of personal choice that financial means can bring.  It is for this very reason that parents approach it with a mixture of fear and trepidation. 

To some, it is the quintessential way to teach children financial literacy as well as character traits like patience, thrift and generosity.  To others, however, allowances are dangerous things that take away parental power and authority, and teach nothing more than greed.

Even parents who agree that childhood allowances are “a good thing,” will disagree on when to start, how much to give, and what to expect in return.  Despite varying opinions, the majority of personal finance experts and childhood development specialists agree that an allowance is an excellent teaching tool.

Therefore, to avoid any negative consequences, be sure to follow the advice of Paul Golden, president of the non-profit National Endowment for Financial Education.  He wrote that an allowance should be used “only as a means of teaching money management—not as a source of reward and punishment or as a means of control.”  With these foundational guidelines in mind, here are additional recommendations that address the most common questions parents have about allowances:

When should I start giving an allowance?

Ron Lieber, New York Times columnist and author of The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart about Money, recommends starting early – at preschool age – because even three and four-year-olds can distinguish between needs and wants.

Others recommended waiting until kids are about five when they begin to understand how the different denominations work, or six years old when their understanding of the concept and value of money emerges more fully.

How much allowance should I give?

Bruce Helmer, the author of Real Wealth: How to Make Smart Money Choices for What Matters Most to You, concludes there is no hard and fast formula on how much you should be giving your children for their allowance.  “It has to be driven by the cash flow of a particular family.”

However, Lieber’s advice is a bit more specific:

Give your kids just enough so that they can get some of what they want, but not so much that they don’t have to make a lot of difficult trade-offs.  Let them own those, so they know what it’s like to make financial decisions that resemble grown-up ones.

For a child who is three or four years old, Lieber suggests starting with a dollar per week for each year of age.  He also recommends dividing the money among three jars labeled Save, Spend, and Give:

This is a rough approximation of an adult budget, so it’s literally foundational.  More importantly, the jars are stand-ins for the values that we hope to imprint through conversations about money.

Should an allowance be linked to chores?

Although a traditionally held viewpoint, most experts now recommend separating household chores from receipt of a regular allowance.  Their reasoning is that your offspring should learn responsibility and the need to contribute to the family without getting paid for it.

However, apart from basic household chores, kids can be paid for larger tasks.  Golden explained that many parents choose to give a base allowance whether their younger children and teens have earned it or not, and then pay extra money for bigger chores.

Clare Levinson, CPA and author of Frugal Isn’t Cheap: Spend Less, Save More, and Live Better, believes this approach will help your offspring to become enterprising and entrepreneurial.  She recommends encouraging them to think of ways they can earn extra money, “Then they have to learn negotiation and a work ethic.”

Above all else, Lieber reminds us, “Allowance is instructional, and money is a tool.”  Taking the long-term view regarding the benefits of helping your children to adopt healthy financial attitudes and behaviors will guide your decisions about allowances and the money lessons you convey.

Sources:  “Should You Give Your Child an Allowance?” by Geoff Williams, http://www.US News.com; “You’re Doing Allowance Wrong” by Ron Lieber, http://www.Slate.com; “Should You Give Your Kids an Allowance?” by Denise Cummins, Ph.D., http://www.psychologytoday.com.


Reprinted by permission of Money Quotient, NP

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