“Working to help parents raise money-smart kids.”
Hello, friends!
I hope you’re having a relaxing July 4th holiday.
Before you scarf down hot dogs and apple pie, here are some nutritious nuggets to perhaps help our kids’ journeys towards financial independence.
A friend recently sent me the No Stupid Questions podcast hosted by journalist Stephen Dubner of Freakonomics fame (book and podcast) and Angela Duckworth, author of the bestselling book Grit.
Specifically, this friend forwarded me the “Should You Give Kids an Allowance or Make Them Get Jobs?” episode (for obvious reasons 😉).
Dubner and Duckworth begin the episode with three questions from listener Valerie:
- Should allowance be given for chores or not?
- Does the method — cash or debit card — make a difference?
- Is there a minimum or maximum amount of money that best teaches responsibility without spoiling?
- Is there scientific research that best shows how children learn to manage their money?
But wait! That’s four questions, John!
That’s because we can toss out the last question. Not because it’s stupid, of course, but because Duckworth, who also teaches at the University of Pennsylvania, tells us, “There are no random-assignment studies that have definitively shown, ‘This is how children should be raised or taught when it comes to [money].’”
Interestingly, Dubner and Duckworth pivot away from these questions to address kids working and to discuss a problematic survey. So I hope to provide some clarifying perspective. You can tell me if I succeed or not.
— 1 —
Putting Our Kids to Work: As the podcast episode’s title suggests, the conversation largely centers on jobs. Dubner and Duckworth advocate for getting our kids working as soon as possible. I agree with them.
Duckworth rightly notes, citing supporting evidence, that learning to work for people other than your parents is a valuable life lesson. What’s more, working at a young age has the added benefit of helping kids sort out what type of work they might enjoy and, just as important, what kind of work they can’t stand.
Case in point: My kids spent much of last summer doing quality control in a warehouse. They had a terrific boss, were provided delicious lunches and enjoyed the coworker conversations.
They were also bored to tears. This summer, they wanted to do anything but go back. 🙅♀️
Interestingly, during the podcast Dubner and Duckworth discuss the Effort-Endowment Effect. Research shows that we value money because we put our “sweat equity” into it. So despite her professed boredom, my daughter told me last summer that what she made from her warehouse job felt much more like her money than her allowance did.
Still, most kids won’t start meaningful work until they’re in their tweens, a statistic again supported by research and underscored by listener anecdotes.
So if you wait until your kids get jobs, then you will miss several crucial, formative years during which they can begin to practice with money and to learn to use it as a tool.
That gap can be bridged with an intentional allowance.
— 2 —
Making Allowance Useful:
“If you are going to give your kids an allowance, then take a little bit of time to actually encourage them to save. […] Don’t expect it to teach any kind of financial savvy unless you scaffold it.”
– Angela Duckworth
As you might imagine, I totally agree with Duckworth. And as a frequent reader of this newsletter, you know I advocate for being very intentional with an allowance.
“If you’re a kid, and you’re given $30 for doing nothing, of course you’re going to spend on the stuff that you want.”
– Stephen Dubner
And, naturally, Dubner is correct.
Your intentions matter. An allowance without a purpose is just a handout.
The purpose of an allowance is to help kids learn to use money as a tool and to help them discover three core money-smart skills readers of The Art of Allowance will recognize: setting and saving for goals, learning to make money-smart choices and distinguishing between needs and wants.
So when you start an allowance for your five-year-old, for example, you’ll want to tell her that you’re doing so to help her learn to become money-smart. And for more tips on beginning your journey, you can reference this essay.
Of course, your allowance can and should grow with your kids, and there are many tactics you can use to ensure your system is helping you get across the values you want them to embrace. Dubner identifies one such tactic on the podcast: He matches any money his kids add to their savings accounts. Duckworth wittily refers to this strategy as a form of “challenge grant,” while Dubner refers to his approach as the “Bank of Dad,” an idea originated by my podcast guest David Owen.
— 3 —
Survey Needs a Save: During this podcast episode, Dubner also questions the value of allowance, citing an AICPA (The American Institute of CPAs) survey about which I wrote a critique, “What the Allowance Survey from AICPA Gets Totally Wrong (And Very Much Right)”. The gist of my analysis is that the survey raises concerns about the fact that the majority of kids’ allowances are being spent and not saved.
Of course they are!
The purpose of an allowance isn’t to hoard money in a savings account. Rather, an allowance should give kids the opportunity to practice with money. And to Duckworth’s point above, we must provide a scaffolding for learning by using a three-jar system.
The Art of Allowance version of this system suggests using nudges like the ones popularized by Richard Thaler and Cass Sunstein: We opt our kids into a jar system in which portions of their allowances are used in ways we think will be good for them. For example, an initial five-dollar-per-week allowance might look like this:
- One dollar into the Save jar (This “nudge” teaches the importance of “paying yourself first.”)
- One dollar into the Share jar (This “nudge” shows that charitable giving is an act our family values.)
- Three dollars into the Spend Smart jar (This houses discretionary money our kids can use as they wish.)
The AICPA report raises concerns that kids aren’t saving half (Or more!) of their allowance. 50%?!? Most financial advisors advocate a savings rate between 10% and 20%. And considering that our national savings rate hovers somewhere between 5% and 10%, why are we holding our kids to such a ridiculously high standard? 🤷♂️
Simply put, the survey misinterprets to the purpose of allowance.
“One reason that we give our children allowance — Valerie seems to imply — is that, yeah, it will teach you about money, so that when you work and earn your own money, you will have a better sense of what to do with it.”
– Stephen Dubner
Yes! But only with intentionality.
And, of course, we want to start early. Duckworth notes that more self-regulated kids become more self-regulated adults. Think of self-regulation as the ability to rule yourself, like waiting to buy a new jacket because you’re saving for a car.
We begin to develop our capacity to self-regulate by the time we’re three or four. Setting up an intentional allowance can be part of the process that helps kids learn impulse control and delayed gratification. Why would we want to wait?
Oh, and in case you wanted responses to Valerie’s questions, here are a few quick thoughts and links. (Think of these as your bonus Independence Day “3 Ideas to Share & Save!”)
Should allowance be given for chores or not? I cover this topic extensively in my book, The Art of Allowance, and in this post.
Does the method — cash or debit card — make a difference? Research confirms what we know intuitively: It’s easier to spend money with a card than it is to part with cold, hard cash. Still, our kids need to learn to use digital money. I think this lesson is best taught when they’re tweens and teens, when the mistakes they make are of the low-stakes variety.
Is there a minimum or maximum amount of money that best teaches responsibility without spoiling? Perhaps we can invert this question and think about the amount of guidance we can provide as parents. There’s a reason why I call it The Art of Allowance. This journey is more art than science, and we have to figure out where to step in and when we can pull back. The ability to do any of this, of course, requires that we get started.
I want to thank my friend Danny for sharing this thought-provoking podcast episode. I hope you give it a listen and let me know what you think.
As always, enjoy the journey. (And that pie! 🥧)
John, Chief Mammal
P.S. Please consult with a financial or investment professional before engaging in any decisions that might affect your own financial well-being.
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