cash allowance for kids

Financial education: What is wrong about allowance system

I have been restraining myself from criticizing the regular cash allowance system for kids for a long time.

Seven out of ten parents in the USA provide their kids with allowance, where fifty-seven percent of American adults received an allowance when they were growing up. In fact, 81 percent of American parents believe allowance teaches children the value of money and financial responsibility. All this makes allowance a number one financial literacy tool, also pretty much the only one ultimately accepted.

Unfortunately, there might be something allowance system is failing to teach Americans, as only 24% of millennials demonstrated basic financial knowledge and nearly 30% are overdrawing on their checking accounts.

After having led money-related conversations with nearly 500 kids and teenagers in the past 4 years, I would like to share my ideas on why the allowance system may be failing us.

A cash allowance for kids by itself does not teach much

The system is a tool, a pretty basic tool in fact. It won’t teach much unless parents put a big deal of strategic thinking and work into it. Kids will only learn if parents actively participate by recreating real-life spending situations and leading meaningful conversations. As your child grows, the allowance system has to “grow” and thus requires constant adjusting.

The traditional allowance system is outdated

Most households do not yet make use of allowance systems that account for modern-life digital payment and subscription-based cost practices. Traditional allowance systems for kids is cash based, where money is stored in different jars. Our real-life spending, however, is very different. More than 75% of our expenses are written off from our account, while the rest we are often able to spend without any limit through our credit card. If we want to prepare our kids for modern life, we need to switch to electronic allowance systems and forget the old-fashioned piggy banks, with all its pretty nostalgia.

The traditional allowance system develops wrong habits

Did you ever think that the system actually develops a habit of receiving money for simple, repetitive tasks? It is inconsistent with anything we are fighting against at our workplace. If we are worried about our children losing jobs to AI, should we stop paying them for cleaning the dishes and instead focus on development of 21st century skills?

In real life, nearly 70% of one’s monthly expenses are items we have little influence on; these are rent, food and paying back our student loans. Traditional allowance systems where kids get to spend 70% of their “income” on candies and video games hardly prepare them for the harsh realities of future life. On a contrary, we keep practicing wrong spending patterns with no attention paid on paying for any necessities.

In most cases allowance system kills necessity for entrepreneurship.

In conversations I have with kids I always ask them if they are planning to start their own business. “I already have enough money” is an answer I hear far too often. We should not overestimate that a human being gets creative when needs arise. Most of our kids already have everything they want; giving them a regular income for luxuries eliminates any interest in earning an extra buck through a lemonade stand.

If we want our kids to be prepared for independent life in a modern world, it is time we start questioning the old systems. Allowance is the one thing we should completely reinvent or forget about.

Written by Lena Perepelova, Founder of FunFinance Virtual Business School for Kids

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May 2020