The debate about kids’ allowances – whether they should be paid, when, and for what – is probably as old as parenting itself, though only recently have psychologists and financial experts begun to weigh in on the matter.

The discussion primarily focuses on the behavioral impacts of paying an allowance.  Do allowances increase children’s financial literacy and work ethic? Or are they just entitlements that discourage initiative?

Let’s take a look at the various ways kids can get paid by their parents, and the pros and cons associated with each.

  • Regular allowance, tied to chores. This might be called the “Money Does Not Grow on Trees” approach:  no work, no pay. It introduces a child to the reality of having to earn a living – though its opponents argue that it can get kids thinking the ONLY reason for work is money, rather than say personal satisfaction or growth. Most parents probably have a more basic, practical objection to this method: It can be a real hassle to enforce, especially with most kids’ natural aversion to doing chores. Sometimes it is just easier and more peaceful to pay the kid quietly, without further discussion.
  • A regular allowance, paid no matter what. Proponents of this method believe in the “financial literacy” value of giving a child an allowance, no strings attached, as the way to teach them how to handle money. Money, in this case, is not a reward, but a learning opportunity for the child. For time-stretched parents, it’s also easy to administer. Once a week, out comes the billfold or purse. Those against this type of payment believe it is just another form of pampering kids, like giving everyone on the soccer team a trophy whether they played or not. 
  • Money paid to the child upon request for something needed or wanted Interestingly, those in favor of the “money by request” approach cite research findings that financial literacy among kids paid in this way was higher than those paid with an allowance. This payment method, they argue, forces kids to think about what money is used for as well as the costs of the things they desire. The downside, however, is pretty obvious: Any smart child could learn to game the system, hitting up mom or dad only when they are least likely to say no.
  • Money paid for specific or special jobs This is the “bonus for extra initiative” approach. No money is paid to a child for simply being part of the family. He should be responsible for some of the ordinary tasks of running the household, without requiring compensation. If, however, he is willing to tackle a big or special chore, he gets rewarded. One drawback to this system is its irregularity:  The child does not necessarily learn to manage a regular income.

So which method is the best? To my knowledge, there is no one approach to kids’ allowances favored by financial planners. Indeed, if you were to ask me, or any other CFP, the recommendation would undoubtedly be based on what is best suited to the individual circumstances of the child and family. What works with one child may not work with another.

Whatever method parents choose, it is imperative that a money payment to a child be accompanied by a conversation about how that money can and should be used. Even when allowance is regularly paid without any ties to chores or performance, a parent can still require or encourage a child to save a portion, or set some aside for giving.  Learning that money can be put to different uses, and helping children with the decisions about these uses, is a critical lesson for kids, regardless of how the money is paid.