Rethinking the “Allowance”

Simon Zhen

By  Posted on Fri Sep 7, 2012

Simon Zhen is an analyst, staff writer and columnist for MyBankTracker.com. His columns draw focus to all aspects of personal finance and to bank rates, products, and services. More Columns »

Rethinking the Allowance

Cielo de la Paz / Flickr source

For many kids, an allowance is the closest thing to a paycheck. Parents may give them some money on a weekly basis for completing household chores or getting good grades. With time, many children fall into the habit of spending everything they have, knowing  they’ll get money next week. This unsettling financial mindset might be a reason to reconsider how parents approach allowances.

According to a recent study by the American Institute of CPAs, the average allowance totals $65 per month, or a little more than $16 per week. The more disconcerting finding is that only 1 percent of parents say their kids save any of their allowance.

The lack of initiative to save is not surprising. Isn’t there always something that kids want? The latest toys and video games. Junk food. “Hip” clothing. The list doesn’t end.

Many kids cannot make their allowances last until the end of the week. Then, the next week arrives and they become solvent again, but the cycle just repeats itself. Now, this pattern may sound familiar to many Americans — it’s more commonly known as the “paycheck-to-paycheck” lifestyle. Are allowances, in the traditional sense, contributing to a future generation that spends money as soon as it comes in?

Used correctly and introduced at an early age, allowance could instill the concept of financial independence and responsibility.  To make that happen, parents must begin teaching the importance of saving one’s earnings.

But the truth, as seen in the Institute’s study, is that parents aren’t getting their kids to save.

The six-month paydays

Based on my personal experiences, not as parent but as a former child, there may be a better approach to allowances. I never received any form of allowance, my only reliable sources of income during childhood were the red envelopes of cash I received for Chinese New Year and birthdays, which were conveniently six months apart from each other. And, these inflows of cash were, at young ages, considered major windfalls.

Rather than focusing on earning or saving money, my goal was to spend slowly. After all, my next payday was six months away. If I didn’t refrain from frivolous spending, it meant months without any way of buying the things that my parents would never pay for.

In a way, the infrequent “income” taught me to always remain cognizant of the money that leaves my sock drawer. It’s as if it placed a switch in my head that alerts me to when I am about to overspend, and then I wind up not making the expensive purchase. This mental “stop” sign is absent or ineffective for many people who buy what they want when they want it.

Once the concept of credit is introduced, it creates a recipe for a financial catastrophe. Those who rack up a ton of credit card debt or bought the house they couldn’t afford are examples of people who may have avoided their financial predicaments if that internal overspending alarm was present.

Once I entered my teenage years, the mindset to prepare financially for the longer term was pretty much set in stone. When I got my first savings account, much of the Chinese New Year and birthday money was deposited. Since this was still the age of the bank passbook, and I didn’t go to the bank often, it offered another obstacle to spending because I rarely had access to the money. (I wish my parents let me pick my bank like this.)

So, I definitely give credit to my childhood relationship with money for my current frugal habits. If the infrequent “income” offered a worthwhile money lesson for me, it just might do the same for younger generations.

Parents may consider reducing the frequency of allowance disbursements, such as once every month or two instead of every week. Caution: kids are likely to start comparing prices more often or take longer to decide whether or not they should make a purchase. Those are some signs of future financial habits that would put smiles on many parents’ faces.

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  • http://auradis.wordpress.com laura

    I had the same experience! And when I started getting weekly allowance for school lunch, I would skip lunch and save the money. Related? Maybe…