By Luke Erickson
In my last article I discussed the idea that letting children make mistakes with their money is a good thing. But this begs the question, “Where do kids get the money with which to make such meaningful and educational mistakes, fine sir?!”
First, thank you for being so polite. Next, I believe it’s important to teach children how to legally make money in the marketplace as soon as they are reasonably able. And by legally, I’m mostly suggesting that you don’t violate child labor laws. So yeah, sending the wee ones down coal mine shafts is not really recommended these days. But things like babysitting, lawnmowing, lemonade stands, etc., can all teach children the value of a hard-earned buck. That being said, by the time children are old and capable enough to make some hard-earned bucks fairly and legally in the marketplace, many of the educational opportunities of learning how to handle money will have already vanished, much the same way the lemonade mysteriously vanishes at the stand before the customers arrive.
And that’s why they invented allowance, folks. Allowance, as defined by Erickson’s dictionary, is a mechanism for paying your kids to do a job that you usually have to redo yourself. Okay, I jest. The truth is that it often ends up causing you MORE work than if you had just done it yourself in the first place. And this brings us to the parents who decide to bypass the entire labor market system and go straight to the education of handling money with the youngsters by providing entitled allowances — no child labor required. “But I’m no communist!” your typical Idahoan might retort, followed by, “Go back to California, you allowance-entitled hippie!”
Fair enough. But consider the worst of all choices in this scenario: That of doing nothing. This is a category in which about 1/3 of all U.S. parents fall, according to a survey by The American Institute of Public Accountants. But before we really dissect this worst-of-all-choices category, let’s first understand the consequences of extreme allowance systems: pure entitlements and free-market capitalism.
The fear of any sort of entitlement is that the receiver becomes dependent on the handout and never learns to link hard work with rewards. Some parents believe that giving kids allowance with no strings attached will create welfare children. Are we teaching our children unbridled socialism by giving them an entitled allowance? Honestly, I don’t really know. But consider that about 99.9 percent of all kids’ wants and needs are paid by their parents anyway, so perhaps the way they receive their allowance isn’t as important as we think it is.
On the other end of the spectrum, I suppose, are the parents who have chore charts with price tags directly tied to the value of the chore itself. Seems to make a lot of sense on the surface. You work, you get paid — just like the real world. However, some worry that such pure and unbridled capitalism in the house teaches their children to do nothing around the house unless there is a direct financial reward tied to it. Another potential problem comes from the idea that chores have some sort of intrinsic fair market value in the household. But what happens when little Johnny finds out his friend Timmy gets $4 for doing the dishes, while he only gets $1 for doing the same chore in his house? So, moms call moms and neighbors unite in price-setting for chores so kids don’t organize a union-based chore-strike. In the end a system focused on earning can get complicated and instead shift the focus onto EARNING money in an inherently unfair and rigged price-controlled system rather than having kids focus on how to MANAGE their money.
While the other two allowance strategies certainly have their pitfalls, perhaps the strategy with the direst of consequences also happens to be the easiest for parents to execute: The do-nothing strategy. I strongly believe this is the worst strategy of all because it deprives the kids of many valuable early learning experiences of handling an age-appropriate amount of “their own” money and learning from their own mistakes.
The Professor’s System
Okay, here it is folks, the moment of truth. This is where the rubber meets the road. Where the professor applies academic theory to actual real-life kids to see what happens. And……..ka-boom! Okay, it’s not that bad. Through some trial and error, our household has adopted a hybrid allowance system that falls somewhere in the vast gray area between entitled and earned allowance. Here it is in all its gory detail:
First, we begin giving our kids an allowance about a year or two after they are born. We use an app that tracks their allowance in three categories: Saving, Spending and Giving. (We tried cash at first, and it just didn’t work well for us.) These are just numbers in an app, not actual money, so these balances are essentially IOU’s from Mom and Dad. When the kids find something they want to purchase or a cause to donate to (tithes, etc.) we pay for it, then subtract that amount from the appropriate category on the app.
The weekly amounts they receive are based on a graduated system using their ages. We give a certain amount for every year of their age, meaning that as they get older they progressively get more allowance to work with. We haven’t yet determined the age at which the kids will “graduate” out of this type of allowance, but we’ll cross that bridge when we get to it.
The kids are also asked to do chores every day, and in this conversation about chores, we also include other responsibilities like homework and musical practice, as well as the benefits of living in the house, including food, TV time, allowance, etc. In the end, the responsibilities and benefits of living in the house are all correlated though not directly linked. So, in the Erickson household, is the allowance entitled or earned? In truth it’s probably a little bit of both. But the key thing is that it works for us because the kids have responsibilities and we’re also giving them the chance to have meaningful experiences managing their own small amounts of money.
And there it is. In the end, I don’t think the argument is so much about the right or wrong way to handle allowance, but rather that doing something is better than nothing. Just get started. Now if you’ll excuse me, it seems that there are some chores at my house that need to be redone. And, blast it! We’re fresh out of lemonade!
Luke Erickson, Ph.D., AFC®, is an associate professor of personal finance for the University of Idaho. Luke and his wife Rachel have been married for 15 years and live in Meridian, Idaho with their four energetic children. Got questions about kids and money? Email them to email@example.com, and he’ll answer them in future articles.