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Brown economist Emily Oster: How to teach kids 'the idea that money has value' using their allowance

The purpose [of allowance] is to give kids some practice with money while the stakes are low."

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Economist Emily Oster: How giving kids an allowance can teach them about money

When it comes to raising money-smart kids, no one has all the answers. That's what Emily Oster found out a few years ago when her daughter began asking for an allowance. "I keep putting her off, and putting her off and saying, 'Oh, we'll talk about it later,'" she says. "Finally it came to a point where she said, 'Can you please tell me the answer to this?'"

That Oster didn't have one prepared may come as a surprise: The mother of two is a professor of economics at Brown University and the author of several data-driven parenting books. But academia, it turns out, doesn't offer much compelling data on the subject of allowance. "There's very little research that says allowances make your kids superheroes or allowances are terrible in some way," she says. "That meant that pretty much it was kind of up to my husband and I, and how we wanted to think about this."

Oster ultimately decided to give her kids an allowance and use it to teach her kids about money and, specifically, "to teach them about the idea that money has value."

That's a move favored by financial experts. "It should, in my opinion, be used to teach how to manage money — how to get from income coming in to managing expectations, needs versus wants, and savings priorities," says Paul Golden, a spokesperson for the National Endowment for Financial Education. "The No. 1 thing is that it should only be used to teach kids money management. It shouldn't be used as a reward, punishment, or means of control."

Below are three helpful expert guidelines for using an allowance to help raise money-smart children.

1. 'Identify the why'

On reflection, Oster understood that she was hesitant to start doling out cash to her children because she didn't want to feel as though she was spoiling them. "I realized that the reason I was so resistant to the idea of an allowance, even a small allowance that wouldn't be a significant financial burden, was I sort of didn't like the idea of my kids just getting some money for nothing," she says.

It's not an uncommon worry, says John Lanza, author of "The Art of Allowance." "The term itself is pretty weighty. It brings to mind the idea of a handout," he says. "But the purpose is to give kids some practice with money while the stakes are low. It's only a handout when you don't make that explicit. You need to identify the 'why.'"

For Oster, the "why" was twofold. Her first reason was to teach her kids the value of money by making the sorts of small, impulsive purchases kids want exclusively available through allowance money. "It's fine to buy the extra gems in the mermaid puzzle bubble app, but that's going to be your $1.99, not my $1.99," she says. She saw it as a way to restrict splurges, and help the kids understand how much a set amount of money could buy.

Her second reason: instilling a habit of giving back to their community. "This was an opportunity for some learning about some charitable giving," she says. "And so when we give them an allowance, there's an automatic 10% tax on the allowance that goes into a charitable bucket."

2. Create 'buckets' for your kid's income

Oster's choice to create a bucket for charitable donations is a sound strategy, her fellow experts say, and one that many parents do very literally. "I really like the idea, if you have younger kids, of breaking the payments down into separate jars," says Golden. "It gives them a visual connection to where the money is going."

By breaking things down, you can instill money habits that you hope your kid can carry into adulthood. With his kids, Lanza divvied allowance money into three pools: money to save, money to donate, and money to spend wisely. "When they're 5 and you're giving a $5 allowance, maybe you put $1 in the 'save' jar, $1 in the 'give' jar, and $3 in the 'spend smart' jar," he says.

By setting up predetermined jars, you establish a framework for all the money that comes in — including larger cash gifts from relatives, says Lanza. More importantly, you're ingraining good money habits that will come in handy when your kid eventually has paychecks coming in: "You want to set up these nudges so they're in their head later on when you want them to be mindful of their money."

3. Don't tie allowance to chores

One way some parents deal with the feeling that their kid is receiving a handout is to tie their allowance to chores. Oster was resistant to this idea. "In our house, there's a small set of chores my kids do, but they're kind of in the spirit of, 'This is your responsibility as a person in the household,'" she says. "I don't get paid to take my plate to the sink, and I'm not going to pay you to take your plate to the sink, either."

It's not out of line to convey to your children that people have to work for money. If this lesson is a priority for you, consider offering monetary rewards for work you'd pay someone else to do — such as shoveling the driveway — or for work your child may do in the community.

But tying allowance to everyday household chores may set a bad precedent, Lanza says. "It creates the potential for a lot of negativity around money," Lanza says. "Now when they don't do the chore, it becomes punitive. It could create a cloud over the conversations you want to have with your kid."

Those conversations are key when it comes to establishing and reinforcing good money habits in your children, and you should be having them early and often, says Golden. "When your kids are wanting to engage about money, don't just use Charlie Brown language," he says. "Look at the things they're interacting with, whether it's social media or video games, and make it a meaningful conversation. Look to meet them where they are when they show interest."

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