"Mom, can we go to the dollar store?" The day my 6-year-old son, Darren, asked that question, we both learned an important lesson. Since he had been saving money he'd received for his birthday, I took him to what I thought was a dollar store -- you know, the place where everything, supposedly, costs only $1. To my surprise, he had a fit and refused to get out of the car. Why? We weren't at the real dollar store, he claimed. Confused, I asked him, "What is the real dollar store?" His response: "The place where you go and they give you dollars." He meant the bank!
The confusion isn't surprising. Many kids think money is free, or have zany notions about how you get it, explains Jayne Pearl, coauthor of Kids, Wealth, and Con-sequences: Ensuring a Responsible Financial Future for the Next Generation. Cash in on these tips that will give your kid a financial head start.
Making cash available to your child is a must. "If she never has access to money, she'll never learn how to handle it," says Lori Mackey, founder of prosperity4kids.com, a website that teaches kids fiscal responsibility. Determine the amount of the allowance (experts suggest $1 per year of age per week). Then make it interesting by playing "bank." When the time comes for an allowance, issue your child a pretend check. Tell her that she'll need to play bank with you to cash the check. Follow the same steps you would do at the real-life bank, asking her if she wants to have all the money now or keep some in her account to take out in the future. "Discuss the reasons why she might want to save some," suggests Mackey. "For instance, say 'I know you've been wanting some new gel pens. If you save up for three weeks, you'll have more than enough to buy the set you want.'"
Ask a 5-year-old where money comes from, and his answer will probably be "the bank," "Mom and Dad," "the president," or "rich people." He may not fully understand that your family affords things by working. To help him learn about earning, talk about jobs and how people are paid to do them. Then, make a big deal about his having a job of his own. You can hire him to do extra chores, he can sell lemonade or old toys, or he could collect and recycle cans to earn cash.
Turn your kid's bedroom or playroom into a store. Put price tags on household items, give her spending money, and pretend to have a supermarket, a toy store, or a clothing shop. Your child can come up with a list of things she wants to buy, try to work with the amount of money she has, find items on sale, and count out (with your help) the correct amount for her purchases. Make sure she gets a chance to be the cashier. As she gets more spending savvy, you can give her some money and a short list of items that she's in charge of buying next time you go real-world shopping.
What does a kid do with money? Splurge! "A good way to encourage saving is to do a child version of a 401(k) plan," says Ken Damato, CEO of doughmain.com, a family financial-education website. "Tell your son that for every dollar he saves you will add 50 cents of your own," Damato explains. He will likely have no problem socking away a dollar here and there, and this will help him develop smart saving habits for the future. "Kids this age think very short-term, so you have to engage them along the way," says Damato. A piggy bank that lights up or makes a ka-ching sound when he adds money, a colorful chart to see his goal and his progress, or even a clear jar so he can watch his money grow can all make saving more exciting.
Your daughter is trying to convince you that she needs those night-vision spy goggles. Just like she needs a new bike, a remote-control car, and a puppy! Playing the Gotcha! game can help her get a better understanding of wants and needs. First, give her a simple refresher on the difference between the two. "You can tell her that a need is something she must have in order to survive, like air, food, water, and shelter," says Pearl. "Explain that a want is something she'd like to have." Then, set up a family Gotcha! jar. Any time a family member says 'I need' when it's really a want, someone else shouts "Gotcha!" and the person who made the mistake has to put a quarter in the jar, Pearl explains. Your child will be on alert and will love when you slip (you will). Periodically, as the Gotcha! jar fills, your family can donate the funds to a charity for people who really do need things.
Originally published in the May 2012 issue of Parents magazine.