J. Michael Collins on whether allowances help to develop financial capability

Judith Siers-Poisson: Hello, and thanks for joining us for the Poverty Research and Policy podcast from the Institute for Research on Poverty at the University of Wisconsin–Madison. I’m Judith Siers-Poisson. For this episode, we’re going to be talking about whether receiving an allowance as a child increases the financial capability of young people. J. Michael Collins is a professor of Public Affairs and Consumer Science at the UW–Madison and is the director of the Center for Financial Security. He’s also an IRP affiliate. Michael, thanks for joining me today.

Michael Collins: It’s a pleasure to be here.

Siers-Poisson: When we talk about an allowance, what do we usually mean?

Collins: You know, allowance, it means different things in different contexts, but for children, like, in the U.K., they call it “pocket money.” So, I think that’s one way you can think about it. Basically, it’s a relatively small amount of money—between $5 and $10 for younger kids and a little more for older kids—that parents give to their kids to spend on stuff, whatever that might be. So, whether it’s going to the ice cream shop or to the store or whatever it might be, just sort of pocket change that they can use in order to make purchases on their own.

Siers-Poisson: You talk about conditional and unconditional allowances. What’s the difference between those?

Collins: Yeah, it’s interesting because there’s a lot of stuff in the sort of popular media blogs where they say that you shouldn’t give your kids unconditional money. It’s sort of a little bit like the debate about welfare, or welfare benefits. You know, whether people should have work requirements, those kinds of things. So there seems to be a lot of value placed on making allowances conditional on doing chores or doing your homework or, you know, other kinds of conditions. And, you know, we looked at the data and it looks like a half to two thirds of parents do have some conditions. And it’s a little bit more likely as kids get older. But it seems like these conditions really vary. So it could be work. You get paid if you do take out the trash or something like that, or it could just be behavior. It’s a whole different range of conditions that parents might put in place.

Siers-Poisson: How common is it for parents in the US to give their children an allowance?

Collins: It’s surprisingly common. When I started this project, I did not think it would be as common as it is. We see the majority of parents—in fact, it’s probably like three quarters of parents who provide allowances to their kids. It does not seem to vary a whole lot. We’ve looked at other countries and we’ve looked at different demographic groups. And so, you know, it’s pretty common for parents to give their kids, starting probably in later elementary or middle school grades all the way through high school, some kind of pocket money or allowance.

Siers-Poisson: I do want to talk more in just a bit about the differences in which parents in the U.S. give allowances, but first, I want to talk about what some of the reasons are for doing so. We talked about whether kids have to perform in some way to get it or not, but what our parents hoping to accomplish by giving allowances?

Collins: I think parents have a lot of different motivations and any parent out there probably knows there’s different reasons why you might do an allowance. So one is that, it’s an opportunity for the child to make some decisions about their own money. And the idea is that maybe they learn from that. So maybe by giving you the money, instead of me paying for you, for the child to pay on their own, it sort of forces them to be able to make a transaction, to interact with a salesperson, to make a choice, to get change, to do the math behind the change. So, there’s all those kinds of experiential learning that I think parents think might go along with that.

But, you know, there’s another motivation, too, which is, if my child is constantly nagging me for another thing, like “I want a piece of candy. I want this, I want that.” At some point, it’s just easier to give them the money and let them buy it themselves. Like “You’ve got a budget of $10. And so you spend it how you want. But don’t ask me again for those kinds of things.” So some of it is kind of a way to do budget management. And some of it is because they have a larger goal of what we might think of as financial socialization, giving kids experiences so they can learn about how to manage money.

Siers-Poisson: It might also seem like a good way to teach kids delayed gratification. Maybe they want the latest video gaming console. The parent isn’t going to necessarily shell out a couple hundred bucks or something like that. Or, if they did, they’re going to wait till a birthday or a major holiday. So is it also a way to say, “Hey, you say you want this, it costs this much. We’re giving you this much a week. You have to decide if you want to save for it.”

Collins: Yeah, that’s right. And that’s another aspect of allowances that parents often think about, as you know. So, we basically have a savings account. That savings account might be like a piggy bank or a mason jar. But, you know, we’ll put $10 a week into that mason jar, and if you want to choose to spend that on ice cream or treats, you can do that, or you can let it build up and then you can buy yourself something that maybe is bigger that you really want, whether it’s a game or something else. So that is a strategy, too, I think for a lot of parents. It can be challenging because there is a slow accumulation and then eventually a lot of kids do get tempted. And so you sort of have to be, as a parent, willing to accept the fact that, yeah, that piggy bank will get broken at some point. But I do think that’s another motivation that parents have, is this idea of trying to teach savings in addition to part of the allowance.

Siers-Poisson: If there are multiple children in a family, is it maybe also a way to kind of be fair across the board, kind of keep those relationships in place, too?

Collins: Yeah, for sure. You know, we see this as parents have more children. They tend to use allowances even more. And I think it’s for that very reason, that sort of equity and also just to sort of signal what the responsibility is at different ages. And so the weekly allowance is commensurate with, you know, basically getting larger as kids get older.

Siers-Poisson: So, let’s dig in a little more on the different groups of parents. You said that it’s surprisingly kind of across the board that parents do give allowances. What did you find out in your research about whether, or how, income level or economic status determines whether or not they give an allowance, and maybe how it might change their reasons for doing it?

Collins: When I started this project with my colleague Elizabeth White, we sort of assumed that it would be most common to have allowances among higher income, more affluent, typically White families, higher educated families. And we found actually quite the opposite. That allowance was very, very common across income. Even low-income families and families of color are very likely to provide their kids allowances, and even starting at younger ages. Now, older ages, it tends to diverge a little bit. More affluent families tend to give larger allowances to their kids in high school, but particularly at younger ages.

It’s very, very common across different groups and actually even more common among lower income parents. We’re not exactly sure why this is, but based on our reading of other literature and other studies, some of this comes down to parents having a budget and each week they only have about $10 of spending money. And so, if I have two children, I give them each $5 and then they can manage within that budget, because I simply don’t have that flex in my budget to be able to pay for those splurges as they come along. So, it might be a sort of budgeting tool for those parents. It might also be that in those families, money is talked about it and it’s part of that constraint that everyone is facing. It’s like “This is what we have available, and this is what you have.” As opposed to with higher income families, where there may be much more flex in that budget. And so we could make ends meet even if you do have an extraordinary expense as a kid in any given period.

Siers-Poisson: It sounds like maybe the lower income parents are expecting the kids to pay for, not core necessities out of their allowance, but things that may be a higher income family might not expect their kids to pay out of that pocket money, that allowance.

Collins: Yeah, I think that’s right. I mean, for example, we might see as kids get in high school that pocket money actually might be for lunches for more affluent kids. Like, “We’ll give you a budget, but this is your money to pay for food at lunchtime.” Whereas with low-income families, that just may be your pocket money for the week and so not necessarily targeted towards any particular necessity.

Siers-Poisson: You talked about the differences, or not as many differences, between economic groups. But what about racial groups?

Collins: Yes, some differences. I mean, obviously, a lot of our differences across different groups are heavily correlated with income. So Black families are much more likely to provide allowances to their kids. And they actually give a little bit more money than White families, controlling for age and that kind of things. But it also has to do with fact that Black families tend to be lower income. And so we tend to see those kinds of patterns. We didn’t see a lot in terms of Latino families, although honestly, our data set didn’t have a large number of people from that background. The biggest difference we saw was around Black families and that particularly at younger ages, they’re more likely to give allowances and they give a larger allowance when they do.

Siers-Poisson: Were there any other demographic subgroups that stood out one way or another in your research?

Collins: You know, we really thought that we might see, for example, a higher use of allowance among higher educated parents, so if the parent had more advanced education, we thought that they might be more likely to give an allowance. We didn’t see that at all. And in fact, what we saw with higher educated parents, was that they were less likely to make that allowance conditional on chores or behavior or anything like that. So, it was sort of an unconditional cash transfer among these higher educated parents, which, again, it might be related to the fact that they are higher income, so they just had less of a budget constraint. But again, not probably what I would have predicted in that case.

Siers-Poisson: Was there anything in the data that would indicate whether single-parent families were more or less likely to use an allowance as a kind of tool?

Collins: You didn’t see a lot by the characteristics of the parent, a single parent versus a dual parent. We didn’t see a whole lot around. We did see that as there are more children in the households, that would be more likely to have an allowance, although not in, say, a larger amount of allowance, you get more children than a household. But the single parent wasn’t a major driver.

Siers-Poisson: We’ve been talking about the data that you used and this really interesting information that you were able to extract from it. What data were you working from?

Collins: It’s an interesting data set. And I should make the caveat that these are data of children that are now all in their 30s. So these are “older people” now. But this was the panel study of income dynamics, which did a special child supplement in the early 2000s. And so we can actually follow these children, you know, starting in 2002 and can follow them all the way till they’re young adults in the mid 2010s. So, it allows us to see sort of what those children grew up to be, or at least as young adults, what kinds of financial choices they’re making a little bit later in life. So that was why we use this data, even though it’s a little bit older. If we were to do a survey of five- to 15-year-olds today, we might see slightly different allowance trends, although most of the other data I’ve seen seems pretty consistent. So, my guess is that we’d probably see pretty similar things with kids today.

Siers-Poisson: Michael, you just said that these are now young adults in their 30s. One of the big questions was, does receiving an allowance as a child help young people manage money and have more financial capability. And according to your research, your analysis, does it?

Collins: I would say sort of. Basically, what we find is in the early 20s, so we’re talking about age 18 to 24, somewhere in that range, the children who received allowances 10 years ago. So now they’re 18 to 20. So back when they were eight to 16, they got an allowance. They are a little more likely to report that they are financially responsible, meaning things like that they are paying for the rent, their food, their parents aren’t sort of paying their bills for them. So, it does seem like they’re a little bit more financially independent. I will say though, too, that they also have a little bit more credit card debt. So, are they saving more? Not necessarily. They’re borrowing a little bit more, which may not be a bad thing. They may be good managers of their money. But I think that’s the best evidence we have. We didn’t see that they had dramatically different behaviors. And certainly, those either those who got allowance or didn’t get an allowance weren’t showing any negative behaviors. So, it’s not harmful, but it does seem like they have a little bit higher levels of financial responsibility. And that could be simply that parents have engendered this idea that they need to be responsible. And so, they have to be able to manage their money. They have to be able to pay the rent. They have to be able to pay for their food. And that has resulted in them being able to navigate their economic life a little bit better. And that might include using credit cards at the same time.

Siers-Poisson: So getting an allowance may give people a little extra financial capability later in life. What other tools are there that we know can increase the financial capability and literacy of young people, whether it’s something at home, at school or maybe elsewhere?

Collins: I think the way my coauthor and I really thought about the concept of allowance: really beginning at a very young age, so primary school, elementary school, third fourth graders is that it’s a form of financial socialization. It gets parents talking to their kids about money. And that, in my read of the literature and sort of in my research, I think that’s probably the most important thing, is that kids and parents don’t make money a taboo, that it’s not to be talked about. That it’s not like kids get to age 18, they start to have an income and they’re like, “What do I do with this paycheck? How do I know? What do I do with this? How do I manage it?” So, you know, the more that kids can see financial behaviors, what their parents do, see it modeled, and allowance is just one form of that. I could be a parent that doesn’t provide an allowance, but I still engage my child in decision making around, you know, “How are we going to spend our money? Let me explain to you how much I make and where that money goes and that I pay taxes.” And understanding how all of that works, I think is also part of financial socialization and that also contributes to financial capability and financial literacy. So, allowance is just one tool that parents have. And, you know, we don’t know in our data. It’s very possible that these parents provided allowances, and also did things like talk about savings and talk about, family choices, about finances or even health, things like taxes and payroll and those kinds of how things work.

So that to me is the real crux of what an allowance is. It’s a signal that parents are willing to engage in money conversations with their children. And that, I think, is the most important thing—when money is a taboo, when kids grow up thinking that money is something that I shouldn’t pay much attention to or take care of itself, then they turn 18, 19, and there are on their own and they learn from the school of hard knocks how difficult it is when you don’t have enough to make ends meet, when you get behind your bills, when you face, you know, maybe late fees or penalties or you can’t get an apartment. And so, the more we can have parents engaging with their kids around money issues, the better.

Siers-Poisson: So that on some level assumes that parents have a level of financial understanding, and literacy, and capability to pass on and to share. If they don’t, if they were basically the 18-year-old themselves who said, “I just got my first paycheck and I have no idea what to do.” Are there other ways that we can support young people to develop those skills, either in some kind of academic setting or in some other way?

Collins: That’s a great point. If we do surveys of people’s ability to answer basic financial literacy questions, the majority of people don’t pass them. I think in some studies, passing is three out of five and the majority of people can’t get three out of five questions correct. So we do have a real lack of financial literacy. And so that makes parents uncomfortable. I mean, that’s why that taboo exists, because parents feel like they don’t really know what they’re doing. So they don’t want to talk to their kids about these things.

One of the strategies that many states now, about two thirds of states, including in Wisconsin, are requiring kids to take financial education in school. So that might be, of course, in high school and in some of the better implementations in schools, they’re doing it in middle school and in high school. So it’s not just one time, but multiple shots. Those are really important ways to sort of level the level of knowledge, so that every kid has access to information about financial literacy. And we’re not talking about high finance here. We’re talking about understanding how bank account works. And not to be distrustful of banks, to understand basic budgeting, to understand that there’s insurance and that you need to have insurance on your car, that life insurance can be a really valuable thing. It’s just kind of understanding the marketplace. And the kids who have access to that, we can see that they’re a little bit better off as young adults are less likely to make mistakes. That they don’t get behind on their bills. They don’t end up with negative items in their credit reports and those kinds of things.

So, there is real value to financial education in school, especially because a lot of parents just don’t feel comfortable doing this. It doesn’t say that we shouldn’t also try to increase the financial literacy and financial capability of adults, that we need to help parents to feel more willing to be like, “You know, I don’t know I don’t know how this works and I need to find out how to do that.” And, you know, sometimes even it can be that high school kid who’s taking a class who can help their parent to figure out some of those issues. So really, is an intergenerational issue. And I think the more we can think about it in that holistic way, the better.

Siers-Poisson: Talking about the educational solutions or tools, are there any policy or legislative tools that you see could also advance the general financial literacy of people in the United States?

Collins: Yeah, you know, there’s been a lot of policy discussion about the role of financial literacy at the state level and at the national level. It’s really hard to implement with adults. And so, in-school based financial education, I think we’re seeing more and more states do that. And I think the policy really should just be around, how can we support it to be good? Meaning the teachers are well prepared, the materials are good. You know, let’s not do it on the cheap. Let’s have high-quality financial education at schools.

But for adults, it really comes down to what we can do through employers. You know, that’s the main way that people are making financial decisions. That’s where their paycheck is. That’s where they’re doing things like saving for retirement. And so, the more we can think about supports for employers to provide that kind of education, the better. We’ve seen some policy proposals in which employers can get support, maybe things like tax credits or other kinds of support to provide financial education and other kinds of financial counseling at work. Because let’s face it, that’s where a lot of our savings happens, our retirement savings, our college savings, all of those things come from our payroll at work. So those employer-based strategies are ones where I think there’s some hopeful opportunities in the future. But we really haven’t seen a lot of policy movement on that so far.

You know, the last thing I’ll just say is for parents out there, you know, don’t stress about allowances, but also don’t not talk about money with your kids. Don’t make money a taboo in your house. If allowance works for you, there’s some advantages to that. But if it’s not something you’re comfortable with, then it’s OK if you feel like you just can’t provide an allowance on a regular basis to your kid.

Siers-Poisson: Well, Michael, thanks so much for sharing your research and your thoughts on this.

Collins: Thank you.

Siers-Poisson: Thanks so much to Michael Collins of the Center for Financial Security at UW–Madison for sharing his work with us. If you’d like to learn more, check out his paper in the Journal of Family and Economic Issues. It’s titled “Allowances Incidents in the U.S. and Relationship to Financial Capability in Young Adulthood. This podcast was produced as part of a grant from the U.S. Department of Health and Human Services Office of the Assistant Secretary for Planning and Evaluation. But its contents don’t necessarily represent the opinions or policies of that office or any other agency of the federal government or the Institute for Research on Poverty Music for the episode is by point of pondering. Thanks for listening.