Does your family call it “giving an allowance” or “paying an allowance”? How you answer that question can reveal a lot about a family and its values surrounding money and work.

Promoting Financial Literacy
Andolyn*, a mother of four children between 7 years and 16 months in Mobile, Ala., sees allowance as an opportunity to teach her children money-management skills. That's the most often cited reason for giving a child an allowance: to teach financial literacy. Unfortunately, there is little data out there to show that this theory actually works.

In fact, Lewis Mandell, professor of finance and managerial economics at the State University of New York at Buffalo, did a national survey of 12th grade American students and found that those who received a regular allowance did worse than those who didn’t at skills involving financial literacy.

Ann Douglas, co-author of Family Finance: The Essential Guide for Parents (Dearborn Trade Publishing, 2001), looks at allowance as one of many ways to teach financial literacy. Among her other suggestions are setting a good example, explaining real-world issues and teaching age-appropriate lessons. And, she says, "Don’t be afraid to let your child learn a few money-management lessons through the School of Hard Knocks.” As for allowance itself, Douglas thinks an annual review of both level and responsibilities is important.

As a Reward Tool
Many families use allowance as a management tool for household chores. “Allowance can be useful in the context of a behavior management plan,” says Tara E. McKee, Ph.D., a developmental psychologist at Hamilton College in Clinton, N.Y., who sees allowance as a positive and negative reinforcement for desired behaviors.

By paying children to do work around the house, the logic goes, they learn the importance of their work and the gratification of being paid. Some families add to a basic amount of allowance if chores are done or pay per activity.

Another common role of allowance can be as matching funds for money saved from earnings outside the home. Andrew*, 15, of Alexandria, Va., receives money to match his earnings from a job helping an elderly neighbor bring her trash to the curb every week.

Many families decrease allowance as their children start to earn more. A parent of two teenagers, Jo*, only hands her children enough to cover their school lunches now that they both have after-school jobs. She advises parents to make sure there is a sense of earning it. "Don’t just give them money,” she says.

No Strings Attached
Other parents separate responsibilities from allowance. Susan*, of Warrenton, Va., whose three children receive an additional $.50 each year in their allowance, says, “Part of being in our family is helping around the house, and part of being in our family is receiving an allowance.”

Rachel*, a mother in Massachusetts, thinks allowance as payment for chores could backfire. “It didn’t make sense to sort of make it optional – today if you don’t care about your allowance then you don’t have to take out the trash,” she says.

Dave Royle, the Canadian author of My Allowance, advises a two-step approach to allowance. Up until the age of 10, he feels allowance should be an entitlement, just as doing simple chores should be expected. Around the time they enter the sixth grade, he says, allowance can be tied to chores and should be set at $1 per grade level.

Managing Spending
What a child is expected to do with their “own” money also varies between families. Many families enforce a savings plan for some percentage of the allowance – just as the family budget sets aside savings for retirement or long-term goals.

Many parents increase the allowance as a child matures, and at the same time add to the categories of things a child is expected to pay for. For example, a high school student might begin paying for school clothes out of his or her allowance as they take on the responsibility of driving and shopping on their own.

Going Without Allowance
There are also families for whom allowance is never instituted. Karen*, a mother in Virginia with four teen and adult daughters who has never paid allowances, says, “The policy in our house is don’t spend it. If you need it, ask, and you’ll get it if it’s not ridiculous.”

In addition, sometimes the family budget does not allow for giving extra spending money.

A Family Tradition
Families often use allowance to teach the values they learned from their own parents. In this way, continuity between generations adds to the importance of the custom.

One attorney and financial expert with two young children says her family is following family tradition in their approach. Allowance, in her opinion, is “a good idea” and is tied to age and some chores around the house.

Doris*, a grandmother in Alexandria, Va., whose two sons have long since left the nest, recently reflected on her experience and feels now that allowance is about more than what the child can get with the cash in their hands. She feels allowance also teaches that “they can’t always have what they want.”

The debate over allowance is not likely to stop soon and is one most parents feel strongly about one way or another. It's simply up to you to decide what makes sense and works best for your family.

*Names have been changed.

Want to see more?

• Raising Financially Savvy Kids
• A Good Investment: Teaching Kids How to Invest in the Stock Market
• The Value of a Dollar: Teaching Money Management Skills to Children
• Talk about it!