Lewis Mandell, Ph.D.

Child Allowances - Beneficial or Harmful?

Lewis Mandell, Ph.D.

      Giving a child an allowance would superficially appear to make a lot of sense.  Children need increasing amounts of spending money as they grow older and do more things independently.  In addition, a regular allowance can teach budgeting and responsibility, build financial literacy and encourage beneficial habits such as saving and debt avoidance.   For this reason, allowances have been studied by scholars for 50 years, largely in the US, Canada, Europe and Australia.

      After reviewing the literature, I have found that the effect of an allowance is consistent across cultures and time periods.   Literally, without exception, studies have found that giving a child an allowance, particularly a regular, unconditional allowance that the child can depend upon, is a terrible idea.  It could be considered a form of child abuse.  An unconditional allowance is statistically associated with diminished financial literacy, lower levels of motivation and an increased aversion to work.

      The 2000 Jump$tart national survey of found that less than half of American high school seniors reported having received a regular allowance when growing up. [1] Thirty five point three percent received an allowance based on chores and 10.5% received an unconditional allowance.  Those who received no allowance had the highest mean financial literacy score of 52.5%.  Those who received an allowance dependent on chores had the second highest score of 52.1%.  Those who received an unconditional allowance had the lowest rate of financial literacy with a score of 49.1%.

      Of those with no plans to attend any type of college, 25% received an unconditional allowance in contrast to just 10.5% of all students.  This was not because they were from families with low socio-economic status.  In fact, children of college graduates were more likely to receive an unconditional allowance than children of parents with less education.

      Children who received an unconditional allowance knew much less than others about savings, spending and credit.  Not surprisingly, nearly a third of those who received an unconditional allowance had never worked in the paid labor force.  This compares with less than 20% of those who received no allowance and about 15% of those who received an allowance for chores. 

      We do know that having a job is positively related to financial literacy which, in turn, is positively related to self-beneficial financial behavior.  Fifty years ago, the American scholars Marshall & Magruder[2] found that children’s knowledge of money is related directly to the extensiveness of their experience with money.  However, they did not find that children have more knowledge of money if their parents gave them an allowance.  In England, Newson & Newson[3] studied 7 year olds and found that middle class children received lower allowances than working class children but were far more likely to save some of it.  The savings habit was clearly learned at home but didn’t relate to the size of the allowance.

      English scholars Sonuga-Barke & Webley[4] interviewed parents in England in 1993 and found that “a surprisingly large number do not make any concerted effort to ‘train’ their children in the management of money.”  They felt that this may account for the weak relationships between parents’ attitudes and values and their attempts at economic education of their children.

      It is much easier to give kids money than to train or educate them about it.  In 1990, Miller & Yung[5] found, contrary to adult conceptions, there was no evidence that American adolescents understand pocket money to be an educational opportunity, promoting self-reliance in financial decision making and money management.  In fact, most adolescents saw allowances as either an entitlement for basic support or earned income.  They concluded that the significance of allowances for adolescents is not the receipt of money per se, but how the conditions of receipt are evaluated, the extent of work obligations, and monetary constraints on the amount, use and withholding of income.

      Thus the economic socializing power of parents may depend primarily on the explicit rules they set regarding allowances and the adolescents' agreement and understanding of these rules.  In Australia, Warton & Goodnow[6] found in 1995 that  adolescents saw household work more as a mechanism to earn pocket money in contrast to adults, who saw their purpose significantly more as a way to learn that everyone has to do their fair share, learn how to be helpful, and do what needs to be done.

      Canadians Pliner, Freedman, Abramovitch & Darke[7] conducted a number of experiments in Canada in the mid 1990’s comparing children who received an allowance with those who did not.  They found some benefits from an allowance including the ability to use credit and price goods more accurately – all spending related skills.  However, the authors suggest that the allowance system works only when it engenders a relationship of trust and expectation which requires the child to become financially literate and experienced.

 Parental involvement in, and commitment to, an allowance system appears to be essential if it is to effect the monetary beliefs and behaviors of children.  In France,  Lassarre[8] found that the best allocation strategy is giving allowances paired with discussions of the family budget.  They conclude that the mechanism that makes an allowance system effective is the possibility it affords for discussions about financial matters within the family.

      Several studies found that allowances negatively impact the desire of children to work.   In the US, Mortimer, Dennehy, Chaimum and Finch[9] studied 1,090 ninth grade students and found no significant effects of allowances  on children’s savings, but did find that students who reported receiving a regular allowance in the ninth grade were less likely than other students to view work generally as a source of intrinsic satisfaction.  They warn that parents and financial counselors need to be careful about undermining the development of work values through allowance practices.

      We can conclude by stating that by themselves, allowances do not lead to increased savings or financial literacy.  In fact, children who receive unconditional allowances appear to be less financially literate than those who receive no  allowance or an allowance linked to household chores.  In addition, children who receive an allowance (particularly an unconditional allowance) are less likely to work outside the home which diminishes financial literacy and tends to reduce the intrinsic value of work. 

      Few children understand the parents’ purpose in giving an allowance and tend to view it as an entitlement.  If parents intend to use the allowance to teach their children or to socialize them as part of a family unit, they must communicate the purpose and rules of an allowance and share more of the family’s financial constraints with the children.

      There is no silver bullet to make children financially literate or financially responsible.  Just as it’s a waste of societal resources to dump these problems on the underfunded, ill-equipped schools, parents cannot solve the problem by buying their kids off with a weekly bribe called an allowance.

• Learning anything worthwhile requires hard work, discipline and repetition (think multiplication tables or a foreign language).  An allowance can be a useful tool in this learning process.