By Eileen Ambrose, The Baltimore Sun
3:55 PM EST, January 13, 2012
The conventional wisdom is that allowances make children responsible money managers as they learn to budget so they don't run out of cash.
But Lewis Mandell, professor emeritus of finance and former dean of business at the State University of New York in Buffalo, says that's not always the case. In fact, says Mandell, who has studied financial literacy, certain allowances may even be hurting kids.
According to Mandell, high school students who didn't get an allowance performed better on a financial literacy test than those who did, especially teens who received stipends with no strings attached. And children receiving unconditional allowances — no chores required — also were less motivated to get a job or go to college, he says.
Mandell goes further, saying these unconditional allowances could be "child neglect."
Those are fightin' words among some financial professionals. Indeed, even to question the benefits of an allowance can trigger a spirited defense of the practice. If there's any debate about allowances these days, it's usually whether parents should require children to do chores to receive one.
Mandell didn't start out to discredit allowances. In fact, the 68-year-old received an unconditional allowance when he was growing up and gave one to his daughter. Both turned out fine, Mandell says.
For years, Mandell oversaw the high school financial literacy tests conducted by the Jump$tart Coalition for Personal Financial Literacy, a nonprofit promoting financial education.
There's not a wealth of current research about allowances and their impact. The coalition's survey in 2000 — the only year teens were asked about allowances — found that high school students who didn't receive an allowance had an average score of 52.5 percent, a failing grade.
But students with allowances did worse.
Students required to do chores for their allowance received an average score of 52.1 percent, not that much lower. But students pocketing unconditional allowances scored an average of 49.1 percent, statistically significant, Mandell says.
One-quarter of high school students receiving unconditional allowances had no plans to go to any college — regardless of family income — compared with 10.5 percent of all students surveyed, Mandell says.
And kids with unconditional allowances, Mandell adds, were less likely to have ever held a paying job. Jobs are one of the best ways for kids to learn about finances.
Mandell says kids without allowances performed best because they're forced to talk to parents more about finances.
"Kids have to talk to their parents to get money from them and offer some sort of explanation. 'I need it for car fare or books. I need it to go to the movies,'" he says. "And the parents at least have the ability to interject, to even withhold the funding if they don't think it's appropriate."
The scores of teens with allowances tied to chores were a close second because they, too, must have regular discussions with parents about whether they earned their pay or not, Mandell says.
"Why do people who get a straight nonconditional allowance do worse? That's the real question," Mandell says. "My hypothesis and the findings of others is that many parents give an allowances as almost a substitute for interacting with their kids."
Mandell, in an article on the topic, cites studies that say an allowance alone doesn't make a child a better saver or more knowledgeable about finances.
One study, for instance, found that American youngsters didn't understand that an allowance was supposed to be an education on money management, and some considered it an entitlement instead, he says. Another, involving nearly 1,100 U.S. ninth-graders, Mandell says, warned that allowances could weaken the development of work values.
A third study, Mandell says, found some benefit to allowances — children who received them were better at using credit and pricing goods.
Mandell still likes allowances as a teaching tool — provided parents structure them correctly. "If you give an allowance, give it with some expectations. It should not be just an entitlement," he says.
Many financial professionals encourage parents to give allowances, and all have their own ideas on the best way to dish them out.
Neale Godfrey, founder of the Children's Financial Network, which promotes financial literacy, says there are many variables that might explain why children who don't get allowances performed better on the Jump$tart literacy test. But she says allowances — with chores — work. That's what Godfrey, 60, received as a child.
All children should be required to do certain household tasks unpaid, she says. But kids then can earn money by taking on extra tasks, such as vacuuming or the laundry.
"The consequences of not doing your chores: You don't get paid," Godfrey says. Just like the real work world, she says.
Godfrey recommends that children put 10 percent of the money away for charity and divided the rest into thirds. She says a third should go toward immediate spending, while another third is set aside for medium-term goals, such as an iPad. The final third should go toward long-term objectives, such as college or a car.
Janet Bodnar, author of "Raising Money Smart Kids," likes allowances, too.
"I wish I had gotten an allowance," the 62-year-old says. "I would have learned to manage money sooner."
Bodnar advises not to tie allowances to household chores that kids should do anyway, such as keeping their rooms clean.
Allowances, though, should come with financial responsibilities based on the child's age, she says. For example, young children could be responsible for buying their own small toys, Bodnar says, while middle-school students might be required to pay their own way at the movies. Teens could be responsible for paying for gas or their cellphones.
This is much easier for parents, she says, than having to track whether kids did their chores and deserve to be paid.
Brad Klontz, a psychologist and associate research professor at Kansas State University's Institute of Personal Financial Planning, says kids should have responsibilities around the house — but that their allowances shouldn't be tied to these chores.
"It gives a message that 'Unless I get paid for it, I'm not doing it,'" he says. And that, he says, leads to family arguments.
"Allowances for most parents are a missed opportunity," Klontz adds.
Klontz suggests parents set up rules on what children can do with their money. For example, he suggests, one-third could be set aside for spending, another third for saving and the rest for charity. It's similar to the allowance structure he grew up with, although the 40-year-old Klontz says he didn't have a savings component.
(Full disclosure: I didn't get an allowance, and I think it made me less of a spender.)
All these different approaches can be confusing to parents who want to raise money-savvy kids.
But there is one common denominator in all these views. Each requires regular parental involvement, whether talking to children on why they need money, if they've done their chores or what to do with their cash.
So whatever tack you take with children, make sure you have ongoing conversations about finances. That's how they will learn.
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