What are the pros and cons of giving your child an allowance?
AI's response in regular print | Beverly Hills, CFP®, Joe O'Boyle's in italics
OpenAI’s ChatGPT tool responds to an investor question and Certified Financial Planner™ professional, Joe O’Boyle, fine tunes the AI response (in italics). This should be fun!
“Pros: What are the benefits of an allowance for children?”
An allowance can be a helpful tool for teaching children about money and financial responsibility. Here are a few potential benefits of giving children an allowance:
Encourages saving and investing: An allowance can help children learn to save money for the things they want. Encourage your child to set aside a portion of their allowance for short-term and long-term goals.
Teaching children about the benefits of goal setting and the value of saving and investing over time towards achieving an objective can have a profound impact on their financial success in the future. Understanding the power of time and compound returns at a young age has the potential to be an incredible advantage for your child in managing money over their lifetime.Teaches budgeting skills: An allowance can also help children learn to budget their money and make choices about how to spend it. This can be a valuable skill that will serve them well as they get older.
Learning how to intentionally spend less than their allowance while regularly practicing the discipline of tracking their spending are wonderful money habits for parents to cultivate. Help your child develop their budgeting skills and spending discipline by starting with simple, attainable goals. In my personal experience as a financial planner, budgeting and successfully managing cash flow is a skill that is improved over time by practice and creating good habits.Builds financial independence: An allowance can help children feel more independent and in control of their own financial decisions. This can be especially important as they get older and start to think about their own future goals and financial planning.
Spending money is about making choices and evaluating trade-offs. Teaching your child to connect earning money based on their personal time and effort - such as completing household chores - can reinforce the value of a dollar earned versus a dollar spent. Teaching your child how to connect spending money with what’s important and developing a value system (such as spending money on an experience with family and friends versus on a material possession) can transform your child’s relationship with money.Encourages responsibility: Giving children an allowance can help teach them about financial responsibility and the consequences of their spending decisions. For example, if they spend all of their allowance on small purchases, they may not have enough money left over to save for a larger goal.
Earning an allowance for completing chores and helping around the house can help a child understand that money is earned and reinforces personal responsibility. Children can feel the satisfaction in working towards an objective and achieving it. They can also experience what it feels like to fail and fall short of achieving a financial goal due to impulsive spending. If children are encouraged to save up for a larger goal, as opposed to spending all of their money right away, they may better learn the value of delaying gratification. The ability to delay gratification is one of the most common life skills shared by our most successful clients.Promotes communication: An allowance can be a good opportunity for parents to teach children about money and to have open and honest discussions about financial matters. This can help children develop a healthy relationship with money and feel more confident in their financial decision-making.
This can also have wonderful benefits long into the future for learning how to communicate openly about money with a future spouse/partner. You may be surprised by how rarely money is discussed in many households and, as a result, how communication about money can often be challenging for adults.
Remember, an allowance is just one tool that can be used to teach children about money. It is important to consider your child's age, maturity level, and individual financial needs when deciding whether an allowance is appropriate and how to structure it. It is also important to set clear rules and expectations for your child's allowance, such as how it will be earned and how it can be spent.
“Cons: What are the negatives of giving a child an an allowance?”
There are a few potential negatives to giving children an allowance:
May not accurately reflect real-world financial responsibilities: An allowance may not accurately reflect the real-world financial responsibilities that children will face as adults. For example, an allowance may not include expenses such as rent, utilities, and transportation that adults are responsible for paying.
Can create entitlement: If children are given an allowance without any expectations or responsibilities, it can create a sense of entitlement and lead to a lack of appreciation for the value of money.
Creating a sense of entitlement is one of the worst case scenarios for providing a child with an allowance as it defeats the purpose. It may be tempting to bribe a child into a desired behavior (“finish your homework”) with the reward of an increased allowance, but this may just teach a child that they can get what they want by not doing their homework.May not teach children the value of work: If an allowance is given to children without any requirement to earn it through work or other responsibilities, it may not teach them the value of work or the importance of contributing to household responsibilities.
The idea of earning an allowance through work or other responsibilities is a key consideration for most parents, so that your child connects the idea of earning money with their time and effort.
Can be confusing: If children are given an allowance without clear rules or guidelines, it can be confusing and lead to misunderstandings about what is expected. For example, if an allowance is given without any expectations for completing household chores or other responsibilities, children may not understand why they are receiving the allowance or what they are supposed to do with it.
Without clear guidance and boundaries from parents on how a child should be spending their allowance, they may not understand the purpose and spend their money wastefully, creating a situation where giving a child an allowance has backfired.
It is important to consider these potential negatives when deciding whether to give children an allowance and how to structure it. To help mitigate these risks, it is a good idea to set clear rules and expectations for your child's allowance, such as how it will be earned and how it can be spent. You may also want to consider tying the allowance to household chores or other responsibilities to help teach children about the value of work and the importance of contributing to the household.
As a parent, you get to decide if an allowance is right for your child. Because each child is different, there is no one-size-fits-all answer. However, it’s important to remember that simply handing money over to a child as an allowance is not how they learn about managing money. If you feel an allowance is right for your child, it can provide an opportunity to teach your child about the value of money and allow them the space to practice and learn money lessons with the goal of creating good money habits for their future.
What did you think? How did AI do?
About OpenAI’s ChatGPT tool:
GPT (short for "Generative Pre-training Transformer") is a type of language model developed by OpenAI that is trained to generate human-like text. ChatGPT is specifically designed for generating text in a conversational style. It is a machine learning model and has been trained on large datasets of real-world conversations in order to learn the patterns and styles of human communication.
Joe O'Boyle is the founder and principal of O'Boyle Wealth Management, a full service financial planning and investment management firm, located in Beverly Hills, California. Joe O’Boyle was named to InvestmentNews 40 under 40 class of 2016, and has a catalog of financial planning and investing articles on Money.com & U.S. News. Disclosure information.