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Financial Fitness

Understand Your Finances

How small rewards can teach children about money

Last year, Jessica and Chris McFadden, of Silver Spring, Maryland, started paying their three children to do chores around the house. The kids—ages 12, 10, and 5—earn small amounts of cash for everyday tasks, such as one dollar for every basket of laundry folded, sorted, and put away, and one dollar for every time the dishwasher is emptied and refilled.

Not only has the system resulted in more help around the house. It has also improved their work ethic, says Jessica, who blogs at A Parent in Silver Spring. "It inspired our 12-year-old son to take on his first job outside the home, walking a neighbor's dog after school."

As the McFaddens found, rewarding children for positive behaviors—when approached correctly—can help make those behaviors last. A study in the Journal of Health and Economics supports this. Researchers found that offering up a small financial incentive for munching on healthier foods doubled the percentage of schoolchildren willing to do so. And the effect was not fleeting. Two months later, those same kids were still eating nearly 50 percent more fruits and vegetables than their unpaid counterparts.

Should you add financial rewards to your parenting arsenal?

The answer is not black and white.

On one end, earning money early in life can help kids learn the basics of managing time and finances, which teaches them accountability and responsibility, and also prevents a sense of entitlement, says Gregg Murset, CFP®, father of six and CEO of Leapspring, which provides apps for kids and parents to keep track of children's jobs and rewards.

Some experts caution, however, against using money as a reward. Eileen Kennedy-Moore, Ph.D., a parent and author of "Smart Parenting for Smart Kids," says that paying children for things they should do anyway can lead to a constant bargaining attitude when given instructions.

Research from the University of Missouri shows that children who are regularly rewarded with material goods grow up to become more materialistic adults who are more likely to value others based on their possessions. Here are four key things to consider doing:

1. Lay the groundwork in your own household

With awareness, parents can introduce monetary rewards to children in a way that increases financial literacy.

2. Let your use of monetary rewards mimic real life

Adults don't pull money out of thin air, they earn it by working. "I don't believe in rewarding children financially for good behavior, but rewarding them financially for completing chores makes perfect sense," Murset says. Consider rewarding your kids for completing household chores or other work, rather than for arbitrary reasons.

3. Offer financial guidance, but let kids decide how they use their money

Earning money is not much fun if you have no say in how to use it. You can help them set limits, such as requiring them to save or donate a certain percentage.

4. Allow children to experience natural consequences

If your child has already spent his money and he sees a toy he wants to buy, don't come to the rescue financially. Learning to delay gratification is a valuable financial lesson.

For more tips and resources on mastering your finances, visit chase.com/financialfitness.

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