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With summer’s chaos subsiding and school starting, it’s time for a financial lesson wrapped in an allowance!
The conventional wisdom behind a weekly allowance is that it impresses on children the limited value of a dollar. But the benefits of financial education are not well-founded in academic research. The benefits of an allowance might have something to do with kids’ confidence in handling their money, which research shows is central to how well adults manage their finances.
Kids between ages 8 to 14 who get an allowance were two times more likely to feel knowledgeable about managing their money than kids who did not – 32 percent versus 16 percent – according to a survey of 1,000 parents and 881 children by T. Rowe Price. The kids with allowances also felt they knew more about credit, student loans, and other financial matters.
It may also benefit children if their parents discuss what can be a highly charged topic of money in front of them. There were wide disparities when the survey compared kids whose parents “have frequent financial discussions” with those who do not. When parents openly discuss their finances, half of the kids felt confident about managing their own funds, compared with only 14 percent of kids who do not hear these discussions.
The lessons learned by making tough decisions about allocating an allowance might pay off later – when they apply for college loans or are presented with their first 401(k) enrollment form.
It can’t hurt for parents to try.