C4WD2P USA, New Jersey, Jersey City, Mother giving money to teenage daughter (14-15). Image shot 2011. Exact date unknown.  stan
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Paying an allowance is a tried-and-true way for parents to teach money management skills to their children and provide a tangible reward for completing chores. But for many parents, this habit may come at the expense of a more important goal -- saving for retirement.

With pension plans going extinct, Social Security's long-term sustainability looking questionable, and savings rates sitting at unrealistically low levels, it could be time to rethink a practice many children (and their parents) take for granted.

Are You Paying Your Children More Than Your Future Self?

According to the 2013 "Parents, Kids & Money Survey" from T. Rowe Price, 47 percent of children receive an allowance. They average just shy of $10 a week (roughly $509 a year). That's just enough for the occasional movie with friends or some purchase, with hopefully enough left to save a bit for the occasional big splurge.

That said, 26 percent of kids receiving an allowance are given between $11 and $40 a week. At the high end ($40 a week), that works out to $2,080 a year. For some parents, even that number may not seem remarkable. But put into context, it's a different story.

Opportunity Costs

Let's say you give your child $40 a week over eight years. That comes to $16,640. Now, let's say you had instead invested that same amount in a low-cost market ETF and earned the market's long-term average of 9.6 percent. After eight years, that investment would have grown to an impressive $25,694.

Here's the kicker: That $25,694 total is more money than 57 percent of U.S. workers have saved for retirement, according to the Employee Benefit Research Institute. And if you pay one child just $20 a week for a year, that annual allowance of $1,040 is $40 more than 28 percent of EBRI respondents say they have saved for retirement.

As with all financial topics, every family is different. But if your retirement savings are less than $25,000 -- putting you in the same boat as 57 percent of Americans -- it might be smart to lower the amount you're handing your kids and stash the difference in a retirement account.

Some argue that an allowance is a way to budget your children's expenses and teach them to be responsible for their own purchases -- meaning they are required to buy their own clothes, fund their own extracurricular activities, etc. And that's a fine way to look at it. But if your nest egg is a hollow shell, you're losing sight of the forest for the trees. Retirement should be the more important line item in your budget.

Explore Other Options

Rather than teaching your children to simply expect an allowance regardless of whether or not they deserve it, brainstorm ways to foster an entrepreneurial spirit in your offspring. Help them set up a small business based around a hobby. Encourage them to get their first job when they're legally able.

You are trying to teach your children to be self-sufficient and prudently manage their own money. But it's hard to teach that lesson if your own financial situation is grim.

Motley Fool contributor Adam Wiederman wrote this article with a vested interest in mind: he has four children (and a fifth on the way.) As such, his children commiserate with the other kids who may now similarly have to do chores without getting paid.

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shiloh.lundahl

I agree that we can over pay our kids and it isn't good. I wrote a parenting tip about it that I called Too High of a Wage at Too Young of an Age. Here is the link: http://www.arizonafamilyinstitute.com/too-high-of-a-wage-at-too-young-of-an-age/

March 06 2014 at 12:57 AM Report abuse rate up rate down Reply
HonknDodge

No it's not. My children are all grown up, but I never really paid any allowance to either one.

March 05 2014 at 8:17 AM Report abuse rate up rate down Reply
Robert

Every time we overpay for gasoline we are robbing our retirement funds. Or pay too much in property taxes. Or pay too much in sales tax. Or federal income tax. The list of gougers goes on and on.

March 05 2014 at 7:19 AM Report abuse +1 rate up rate down Reply
cherkobak

Face it kids cost a fortune allowance or not. Who are you kidding that an allowance is taking away from your retirement. Everything takes away from it and raises are really hard to come by at work. The economy still is not good.

March 04 2014 at 10:24 PM Report abuse +1 rate up rate down Reply
vlady1000

Never gave our 2 kids an allowance, but did lend them $500 to start up a business when they were 11 and 13 which they did very well at until they left for college. Now young adults (28 and 30) and very well off for their age. And to this day, they have never borrowed money except for investment/business reasons. Kids can understand how to make money work for them at an early age if you show them the basics.

March 04 2014 at 6:19 PM Report abuse rate up rate down Reply
pfjw

Speak sharply to your little boy, and beat him when he sneezes.
He only does it to annoy, because he knows it teases.

Lewis Carroll - Alice in Wonderland

Let's keep the women barefoot in the winter and pregnant in the summer. Let's keep the children barefoot all the time and dress them only in work flour-sacks.

All that aside, our kids _never_ had an allowance. They had a list of tasks that they could choose from with a value assigned to each task. That value was derived from estimated costs for that task to be performed by an outside person, cut by 2/3. Which was the overhead for their housing, food, clothing and so forth. There were other factors to account for the absurdity of bringing in a contractor to remove the trash, for instance. ($1.00 for the first three bags + recyclables, $0.30 per bag thereafter). But, for instance, a service would come and pick up the dog-yard for $10 per week (two golden retrievers), and come twice per week. We gave them $3 per pick, and they did it three days per week - trust me, it was worth it. The tasks were within their skill-set and age-appropriate. And they saw us doing all those tasks they did not do, and more. We also pretty much always had some reserve special-tasks if they had special needs. A house built in 1895 always needs something somewhere, so there were "professional helper" opportunities at minimum wage, minimum 4-hours commitment.

It worked out reasonably well, and they were good kids that grew up into great adults with excellent grandchildren that we enjoy regularly. Can't ask for more.

March 04 2014 at 4:51 PM Report abuse rate up rate down Reply
wrkndog

"Explore Other Options

Rather than teaching your children to simply expect an allowance regardless of whether or not they deserve it, brainstorm ways to foster an entrepreneurial spirit in your offspring."

Someone better send this to Obama. I think his financial equality plan needs some help.

March 04 2014 at 2:22 PM Report abuse -1 rate up rate down Reply
tikitd

$40 a week for what? My sons (14 and 12) get $3 a week for cleaning their rooms, dusting the gameroom that they use and Vacuuming their rooms and the gameroom and folding and putting away their own clothes. They work on these chores about 20-30 minutes a week. They also get $5 for every A on their report cards. They are fed and clothed and do not want for much but if they want a new video game or $100 tennis shoes they have to buy them with their money. When they ask if they can buy that new $60 video game I tell them sure it's your money and you earned it. This is usually followed by " I dont really want it." Because they remember the hard work they did to get the money in the first place. Most of the money ends up in their bank accounts. The older one has saved almost 3k over the years from report cards and Christmas and birthday money. When I asked last summer what he was going to do with it he told he was going to buy a car when he was old enough so he could get a job and start saving for a house. I wonder how much work those kids that are getting $40 a week do? Do them a favor and make your kids work for what you give them so they are not some spoiled kid who thinks they should be paid $20 an hour to collect shopping carts in some store parking lot when they get older.

March 04 2014 at 2:06 PM Report abuse +2 rate up rate down Reply
1 reply to tikitd's comment
Sharon

Did the same with my two girls. One turned out to be money-wise and the other has entitlement issues! Just can't win...

March 05 2014 at 8:41 AM Report abuse rate up rate down Reply