Everything You Know About Kids and Money is Wrong
by Stephen Gandel

August 2006

Finding No. 3
An allowance can make things worse

An allowance is supposedly a great tool to teach kids how to manage money. But in Mandell's study, only 36% of the students who'd gotten an allowance as a child described themselves as good savers vs. 52% of those who hadn't gotten money on a regular basis. "In the child's mind, knowing they'll get money every week no matter what they do removes an incentive to save," Mandell believes.

Allowance proponents, like University of Minnesota economics professor Sharon Danes, disagree. She cites other studies that show, for example, that paying kids for chores doesn't instill good financial habits. But what Danes, Mandell and other experts agree on is that an allowance alone doesn't promote good behavior with money. Says Danes: "You can't just put cash in kids' hands and expect them to know how to manage it."

Solution: Set goals, not doles.

The problem may be less with allowances themselves and more with how they are administered. Rather than just providing a weekly handout, Danes suggests talking with your kids about what you expect them to pay for and what they hope to buy. Then help them prioritize their goals. To boost their budgeting skills, Danes also advises lengthening the time between payments as they get older -- sticking with a weekly schedule while they're in grade school, moving to biweekly payments in middle school, then to monthly ones in high school. The hard part: not bailing out your teen when, inevitably, he runs out of cash long before payday and whines about how your stinginess is ruining his life.

Finding No. 4
Stock market games are for losers

The stock market game, a tool some educators use to teach the basics of investing, has students pick stocks for a hypothetical portfolio, then try to beat the market over a short period. Mandell found that playing the game improved students' scores on his financial literacy test. But those junior investors turned out to be the worst savers of any kids who'd taken a financial education course.

How could that be? Mandell guesses that the interactive nature of the stock market game keeps kids engaged, so they learn investing concepts. But because the kids play with fake money, the game does a poor job of teaching about risk. And if the students' picks do well, the stock market game, like an allowance, makes the need to save money seem less urgent.

Solution: Let children learn from real mistakes, made over time.

Teachers need to stress long-term results over short-term gains, says Mandell. And some new programs are trying to do that. At Ariel Capital Academy, for instance, which runs from kindergarten through eighth grade, each incoming class is given $20,000 to invest. For the first few years, professionals manage the money, and the students simply monitor changes in the portfolio. In the last two years, students choose their own investments. The payoff: When they graduate, they're given the option of pocketing their share of the profits (nearly $200 this year) or receiving a gift of $1,000 for their college fund.

You can reinforce lessons about the risks and benefits of investing by talking with your kids about both your losing and winning stock picks. "Kids can learn from our mistakes," says Susan Beacham, CEO of the education company Money Savvy Generation. "That's how they become better investors than we are."

If your kids don't seem to get the message, don't give up. Mandell acknowledges that the benefits of financial education may take longer to manifest than the period of time that he has studied. So far he has followed students for only five years after their graduation from high school -- a period, he notes, when most people have not yet formed true adult behavior patterns. In the only study so far with a longer time frame, Stanford University economics professor Douglas Bernheim found that people who received a course in financial education in high school were, in fact, better than average savers by the time they reached middle age.

So don't despair if your child seems more into MTV than mutual funds. There's still hope that by the time she's 30, she'll prefer Vanguard to Vegas.

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