Experts differ on the best way to handle kids' allowances

When children are old enough to learn simple money management and responsibility, parents begin to discover that paying an allowance is a more complicated question than it seems. Financial experts hold opinions that range from no allowance at all to paying a weekly stipend or tying an allowance to chores.

Read the post-show takeaway

"Allowance systems are effective only when they afford the possibility for discussions about finances within the family, such as why and how families make the financial decisions they do," wrote Lewis Mandell, emeritus professor of finance and former dean of the School of Management at SUNY-Buffalo on Learnvest. "And even then, the conversations could be effective on their own even without giving over the money."

He cited a 2000 survey from the Jumpstart Coalition that showed American high school seniors who received no allowance had the highest mean financial literacy score. Students who received money for chores scored second and those with unconditional allowance scored the lowest.

THE TAKEAWAY: Most parents will only teach poor money skills.

Mandell was glum about whether parents are likely to pass on good financial management skills to their children. He suggested that before parents can pass those skills on, they'll have to pick some up.

"There's some fairly discouraging research," he said, into the benefit to kids of spending time with their parents on money-management questions. "It turns out that the ones who spend a lot of time are no more financially literate than the ones who spend very little time with their parents. And we concluded that one of the reasons for that is that most of the parents themselves are financially illiterate. And so all they do is pass down an oral tradition of wrong information to their kids. ... For most parents who are themselves fairly ignorant, spending a lot of time talking to your kids about it may end up doing more harm than good."

Even worse, he said, kids who receive an unconditional allowance are at risk for growing up to be slackers.

Bill Dwight, CEO and founder of FamZoo, said giving kids an allowance tied to chores or other responsibilities can provide them one crucial benefit: practice.

"Kids need practice," he said. When they get an allowance, he said, "They're getting practice living within that budget, making their own decisions ... I can't imagine driving a car without any practice, or playing music without any practice. It's inconceivable to me that practice isn't a good thing."

What was your experience with allowance as a kid, and how do you handle it now as a parent? Leave your stories in the comments below.

LEARN MORE ABOUT KIDS AND ALLOWANCE:

• Kids and Allowance: The Debate that Divides Us. The main arguments for and against allowance. (Time)

• Give an Allowance...Then Make It Work. Tips for starting an allowance system with your children that helps them understand money management. (Oprah)

• 6 Fun Ways to Teach Kids About Money. Handing allowance over each week isn't enough to teach good habits. Here are some ways to make learning fun. (US News and World Report)

• How Much You Should Pay Your Kids For Allowance. Several factors will help you determine a good amount for your child. (Forbes)

Gallery

Fullscreen SlideshowPrevious Slide

1 of 1

Next Slide