Some experts challenge idea of children's allowances

The conventional wisdom is that allowances make children responsible money managers as they learn to budget so they don't run out of cash.

But Lewis Mandell, professor emeritus of finance and former dean of business at the State University of New York-Buffalo, says that's not always the case. In fact, says Mandell, who has studied financial literacy, certain allowances may even be hurting kids.

According to Mandell, high school students who didn't get an allowance performed better on a financial literacy test than those who did, especially teens who received stipends with no strings attached. And children receiving unconditional allowances -- no chores required -- were also less motivated to get a job or go to college, he says.

Mandell goes further, saying these unconditional allowances could be "child neglect."

Those are fighting words among some financial professionals. Indeed, even to question the benefits of an allowance can trigger a spirited defense of the practice. If there's any debate about allowances these days, it's usually whether parents should require children to do chores to receive one.

Mandell didn't start out to discredit allowances. In fact, the 68-year-old received an unconditional allowance when he was growing up and gave one to his daughter. Both turned out fine, Mandell says.

For years, Mandell oversaw the high school financial literacy tests conducted by the Jump$tart Coalition for Personal Financial Literacy, a nonprofit group promoting financial education.

There's not a wealth of current research about allowances and their effect. The coalition's survey in 2000 -- the only year teens were asked about allowances -- found that high school students who didn't receive an allowance had an average score of 52.5 percent, a failing grade.

But students with allowances did worse.

Students required to do chores for their allowance received an average score of 52.1 percent, not that much lower. But students pocketing unconditional allowances scored an average of 49.1 percent, statistically significant, Mandell says.

One-quarter of high school students receiving unconditional allowances had no plans to go to any college -- regardless of family income -- compared with 10.5 percent of all students surveyed, Mandell says.

And kids with unconditional allowances, Mandell adds, were less likely to have ever held a paying job. Jobs are one of the best ways for kids to learn about finances.

Mandell says kids without allowances performed best because they're forced to talk to parents more about finances.

"Kids have to talk to their parents to get money from them and offer some sort of explanation. 'I need it for car fare or books. I need it to go to the movies,'" he said. "And the parents at least have the ability to interject, to even withhold the funding if they don't think it's appropriate."

The scores of teens with allowances tied to chores were a close second because they, too, must have regular discussions with parents about whether they earned their pay or not, Mandell says.

"Why do people who get a straight nonconditional allowance do worse? That's the real question," Mandell said. "My hypothesis and the findings of others is that many parents give an allowance as almost a substitute for interacting with their kids."

Mandell, in an article on the topic, cites studies that say an allowance alone doesn't make a child a better saver or more knowledgeable about finances.

One study, for instance, found that American youngsters didn't understand that an allowance was supposed to be an education on money management, and some considered it an entitlement instead, he says. Another, involving nearly 1,100 U.S. ninth-graders, Mandell says, warned that allowances could weaken the development of work values.

A third study, Mandell says, found some benefit to allowances -- children who received them were better at using credit and pricing goods.

Mandell still likes allowances as a teaching tool -- provided parents structure them correctly. "If you give an allowance, give it with some expectations. It should not be just an entitlement," he said.

Many financial professionals encourage parents to give allowances, and all have their own ideas on the best way to dish them out.

Neale Godfrey, founder of the Children's Financial Network, which promotes financial literacy, says there are many variables that might explain why children who don't get allowances performed better on the Jump$tart literacy test. But she says allowances -- with chores -- work. That's what Godfrey, 60, received as a child.