10

It seems to me that, if you want to teach children at an early age about the benefits of careful personal finance, and other fun concepts (like an intuitive understanding of compound interest), paying an allowance that's directly related to chores or work around the house is probably a bad idea.

Are there any formal studies on this, or standard answers that are accepted in the personal finance community?

14

I think that is the wrong approach. You certainly need to teach the value of work, but you cannot tie it to income levels as a hard and fast rule. If you do, how do you then explain athletes making millions per year and only 'working' half a year, at most. And, then comparing that person to a person working hard in a factory, 40-50 hours per week, 50 weeks per year, bringing home $50K per year?

I've always taught my kids to work hard and with integrity. And, most importantly, you better enjoy the work you do because no matter how much money you make, if you dread getting up in the morning to go to work, your money won't make you happy. I've never focused on the amount of money they should be making.

  • Yes, but what practical things can I do? If I give an allowance that says "you get $5 if you do the laundry" or some such thing, am I teaching the wrong lesson? How do I teach the proper one? – blueberryfields Nov 30 '10 at 14:16
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    +1 - but don't think anybody who is rich and famous doesn't put in more hours than other people in their field. This applies to athletes, actors, musicians or politicians. Talent alone will never explain athletes making millions per year. It is a different job, but they still work hard at it. – MrChrister Nov 30 '10 at 17:36
  • Yes, I agree with that - it's not the hard work part that I'm trying to figure out, it's the allowance part :) – blueberryfields Nov 30 '10 at 18:00
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    @blueberryfields - under this scheme, an allowance could be just an allowance, having little to do with work. You could perhaps pay over and above the allowance for harder chores or more complicated or out of the ordinary work. – justkt Dec 1 '10 at 16:49
  • Indeed, financial literacy should not be working for a specific rate per hour, but understanding how people of all walks of life earn money - whether it be entrepreneurship, investments or the daily 9-5. I like your answer regarding passion, and also pointing out ~how~ society rewards people, which can be mutable, non-linear and irrational even! I would just add, in the next decade(s) innovation, R&D, tech, AI will completely alter (as it has already) the workplace and job market. If a child does not understand this, they are already at a severe disadvantage. – SaltySub2 Apr 4 '18 at 0:39
11

Completely linear? We don't do that.

Our daughter has a fixed allowance, and we expect a certain amount of help around the house as being part of the family. We don't make any explicit ties between the two, and we don't seem to have any problems.

We bought an eBay lot of Polly Pockets and divided them up into $5 bags. (This is a better deal that what we could get in the store new.) Her allowance isn't enough that she can "buy" one every week.

After sensing her frustration we gave her the opportunity to earn some more money by doing extra work. It happened to be cleaning up after our dogs in the back yard, a chore we had neglected for quite a while. She stuck with the job, and truly earned that money. (She'll be six in January.) What's more, it was a good deal for me. It needed to be done, and I didn't really want to do it. :)

So, for now this seems like a fair balance. It prevents her from getting the idea that she won't work unless she gets paid, but she also knows that working harder does have its rewards.

We still have time to teach her the idea of working smarter.

(This isn't a formal study. It's just my experience.)

  • 1
    That sounds like a good deal. Although it sounds like she could become a victim of only wearing the minimum pieces of flair. I think I will look into doing this with my kid when she is old enough. – MrChrister Nov 30 '10 at 17:47
  • Are you doing anything that helps highlight entrepreneurial or self-starting types of skills? – blueberryfields Nov 30 '10 at 18:22
4

I don't know if it counts as a formal answer, but Dale Carnegie has always preached that income is related to how well you treat and get along with other people. His observation is that the highest paid people are those with the best people skills, because the ability to manage other people has higher value than singular ability.

Conversely, people making minimum wage often work "harder" than people making more money.

The old saw about "work smart, not hard" is a bit trite. In many fields, efficiency is valued over "hard work".

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    +1 for "In many fields, efficiency is valued over "hard work"". Very true. – CrimsonX Nov 30 '10 at 17:17
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    Yup. I'm good at and work hard on things that (at least in the sense of market prices) no one wants, just like how you're free to spend a million dollars digging a hole in your backyard but it won't make the hole worth a million. (Zero, even a lot of it, is still nothing.) One quickly perceives that very little money paid is actually money earned/deserved, rent-seeking, etc. And I am truly grateful to the janitors of the world given how they are one of the few people whose disappearance (provided no one takes up the lucrative slack in such a post-apocalyptic world) would make life miserable. – Vandermonde Mar 2 '16 at 3:07
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As a parent I think you absolutely have to teach them that income is related to work because (for most people at least) it's a more fundamental principle than budgeting, investments, interest, etc. Once they've learned that the primary source of income is work, then you can start teaching them what to do with it, i.e. how to budget, economise, save, invest, etc.

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    But hard work and ethics should come before income. Income will be there if you work hard and are ethical. – MrChrister Nov 30 '10 at 17:48
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    Possibly, but you have to establish the link between work and income. – gkrogers Dec 1 '10 at 23:44
4

Get a copy of Capitalism for Kids - finally back in print (after being out of print for years). It's a great introduction to being an entrepreneur, aimed at young people. Six years old might be a bit early, though - but definitely before the teenage years.

1

My family instilled in me early on that hard work was important, and the output of that work was its reward. My grandparents really made in impression with me about telling the truth and being fair (probably after I was busted for lying and cheating about something) -- I remember my grandfather talking about the solem trust associated with shaking hands over something.

I remember opening a savings account at school on bank day and being really excited about the interest accruing... but my folks never really allowed us to spend it on toys or other stuff. I didn't really think about money at all until I was probably about 10 or 11, when I started watching "Wall Street Week" on PBS with my dad on Friday night and bombarding him with dozens of questions. Then games like Sim City really got me going... my grandmother was always amazed that I was talking about bonding construction projects.

I think that before 10 or so, kids needn't concern themselves with money, but should understand responsibility, the rewards that come from working hard, and the consequences for not doing so.

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