How To Give Your Kid Allowance Like A Child Psychologist

Can allowance actually teach fiscal responsibility?

Originally Published: 
A parent handing a child a dollar as allowance.
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Kids are freeloaders. They live in your home rent-free. They eat your food without so much as leaving a tip. And they expect an allowance. The prospect of giving kids monetary handouts for doing the dishes or taking out the trash does little more than add insult to injury, but parents participate nonetheless. Some hope to teach their children fiscal responsibility or reward positive actions such as chores or success in school. Others are simply worn down by the constant demands for cash. But can allowance actually teach responsibility, or are we all doing it wrong?

Experts have been casting doubt on the merits of giving children cash since at least the ’60s, when Helen Marshall and Lucille Magruder, both of the University of Kentucky, first reported that kids with pocket money displayed no more fiscal responsibility than those who didn’t receive allowances. Fifteen years later, psychologists in England similarly found no connection between allowances and good savings habits. The disconnect may stem from the fact that children often miss the point of allowances entirely — one 1990 study found that American adolescents have no idea their allowances are educational opportunities. Most, infuriatingly, say they’re entitled to it.

“There are conflicting research findings about the benefit of giving an allowance and the acquiring of fiscal responsibility,” says Sharon Danes, Ph.D., a family economist at the University of Minnesota who has written about allowance. Part of the problem is that it’s not always clear whether children are learning good spending habits from their allowances, or simply by watching their parents make smart economic decisions. “The effect of an allowance also depends on the amount of education and monitoring that parents do with the child’s allowance,” Danes adds.

Given the lack of evidence — is it time to abandon allowance?

“Not necessarily,” says Stephanie O’Leary, Psy.D., a child psychologist and founder of Westchester Psychological Services in New York. “If children receive allowance without any contingencies, it sets the precedent that ‘free money’ is available…that money can back-fire and create dependence.” But if allowance is less of a stipend and more of an age-appropriate opportunity to earn money, O’Leary is in favor. “Providing allowance for tasks that are outside the realm of daily or weekly chores can help establish dedication and perseverance,” she says.

“Providing allowance for tasks that are outside the realm of daily or weekly chores can help establish dedication and perseverance,” says child psychologist Stephanie O’Leary, Psy.D.

Danes agrees that there are better ways to teach sound economic judgement than giving your kids a couple of bucks for taking out the trash. She suggests that letting your children sit in on real-world financial discussions can better prepare them for prudent fiscal futures. “Have them work with a parent on the family budget and pay bills with the parent with the guiding voice of the parent,” Danes says. “Let the child know the kind of parental discussions and decisions that have occurred, or as the child becomes older, include them.”

If you insist on giving your kids allowance, experts agree that it’s crucial you tell your children how you expect the money to be used. “Parents should be firm in guiding their children on how to use their money, such as setting aside some to save for long-term items and some for spending now,” says clinical psychologist Wyatt Fisher, Ph.D. “They should only be allowed to spend their money on items their parents approve of.”

Although Danes takes a less extreme approach, she agrees that, at the very least, parents need to use allowance as a springboard to discuss smart spending with their kids. Handing kids money, Danes says, teaches them no more about economics than any other gift. “A mistake parents often make is to just give an allowance without discussing with the child what it is supposed to be used for, what happens if it is all spent before the next allowance comes,” she says.

During this discussion, parents can take the opportunity to instill broader economic values in their children, teaching them about giving to charity or about the value of letting accounts mature over time. “Some families set the precedent that half of all earnings go into savings with the rest to be used without restriction. Other families encourage giving a certain percent to charity and then using the rest for spending at will,” O’Leary says. “Setting these ground rules early will help your child internalize these values and stick with them as they mature.”

Even if you have a savvy little banker on your hands, experts stress that giving your kids money for no reason can be harmful. Dennis Poncher, founder of BILY, a support group for parents, says that his organization counsels parents to not give children allowances unless that money comes with accompanying responsibilities. “Household chores should therefore not be paid for,” he says. Poncher says his clients have had the most success with allowance when the cash flow only comes as a result of the child going above and beyond, such as “cleaning the cat litter, cleaning up after the pets, walking the pets, folding the laundry.”

Preliminary studies back up much of this advice. In 1995, a team of Australian researchers found that adolescents see housework as a way to earn money, suggesting that, when parents set clear benchmarks for what earns allowance, teens can take a hint. At around the same time, Canadian scientists found that the allowance system only works when parents don’t just hand their kids money, but also start conversations about trust and expectations, and demand that their children use allowance not just for fun, but as an opportunity to become financially literate.

“Parents need to remember that an allowance is about not only spending, but about learning saving opportunities,” Danes says.

“Make money a central topic of conversation,” Fisher adds. “Let them in on your thought process with money so they can learn from your wisdom.”

Or, heck, let them pay the bills themselves. When O’Leary’s son took control of the electric bill, she says he instantly became “the light police,” running amok and shutting off lights to keep the family out of the red. When her son took charge of the water bill, he quickly became the only child in his class who knew how to write a check. Of course, O’Leary’s children were not actually paying her electric or water bills, but they were learning about practical economic considerations far earlier than most.

In fact, O’Leary maintains that including children in real-world money conversations and giving them responsibility over small accounts teaches far more about fiscal responsibility than handing them money for doing the dishes, even under the best circumstances.

“Once your child is in grade school, assign them a household bill to be responsible for,” she says. “This teaches them the concept of due dates, interest, late fees, and also ensures a real world understanding of the value of money.”

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