Before you became a parent, you undoubtedly imagined all the fun things you'd teach your child -- like how to solve a puzzle, ride a two-wheeler, and bake delicious cupcakes. Chances are you didn't dream of that magical moment when you'd provide his earliest lesson in financial management.
Money is boring. It's private. It's grown-up stuff. There are any number of reasons to dodge the topic. Mostly, though, parents bypass it because we're uncertain of our own fiscal know-how. Survey after survey has shown that Americans are fuzzy about even the basics, such as inflation and interest rates. Many of us enter the workforce woefully unprepared to balance a household budget or to handle the myriad money decisions that fall into our lap, from retirement to complicated mortgage terms to managing a health-insurance plan.
It's not all our fault. Until recently, money education was virtually absent from most school curricula. And even today, only four states -- Missouri, Tennessee, Utah, and Virginia -- require that all students take a personal-finance course before graduating from high school. How can we help our kids avoid the mistakes that have led to millions of defaulted loans since 2008 and contributed to the recession from which we're still recovering?
By talking to them about money ourselves. Trouble is, fewer than one in five parents give themselves a top grade for their understanding of fundamental saving and investing principles, according to a 2010 survey by the investment company T. Rowe Price. "Sometimes we can express our own insecurity by avoiding the subject," says Joline Godfrey, author of Raising Financially Fit Kids.
If the idea of schooling your child in personal finance seems overwhelming, take heart. "Instilling money literacy doesn't require a lot of planning or knowledge," says Laura Levine, executive director of the nonprofit JumpStart Coalition for Personal Financial Literacy. She urges parents to focus on the basics, like comparison shopping and the importance of planning and saving. When your child masters these concepts, she'll know more than many adults. The key is to start young and keep your talks kid-friendly.
The Lesson: You work to earn money.
No doubt you can still hear your own parents' anguished refrain, "Do you think money grows on trees?" But as Richard Bromfield, Ph.D., a child psychologist and author of How to Unspoil Your Child Fast, says, "Actually, kids today think it comes out of ATMs." Take the time to explain that these machines are like a piggy bank. They hold your money, and when you take some of it out, you have less for next time. How do you get more? By earning it.
Pay them cash for helping you out.
Although you shouldn't reward your child for performing ordinary chores, compensating him for taking on extra projects (such as cleaning out the garage) will help him connect the dots between working and getting paid. Jennifer McIntyre, of Philadelphia, gives her 6-year-old daughter, Lily, a few dollars when she makes the beds or folds the laundry, tasks that go beyond her usual clean-up assignments. "The beds may look a bit wrinkled, but it gives her a proactive way to earn that's connected to her labor," says McIntyre.
Show them where you work.
Your kids may hear about a place called "Mommy's job" all the time, but it remains an abstract concept until they see where you go and what you do every day. This exposure will help your children grasp the relationship between working and making money. "And eventually they'll realize that by spending time at your job, you make money to pay for things your family needs," says Nathan Dungan, a family-finance expert and author of Prodigal Sons & Material Girls.
The Lesson: Everyone needs to think before spending.
Introduce money words and ideas to your child by age 4 or 5. Explain that a "check" is a written instruction telling the bank to take money from your account and send it to the person or store whose name you've written on it; you get a "discount" when the regular price of a product is reduced; and a "budget" helps you plan to pay for things that you need, like food, clothing, and gas. Let her know that when there's cash left over you can spend it on "wants," like going to the movies.
Make a shopping list together.
If your child can't write words, have her scribble or draw pictures of things you need to buy. When you're done, ask which items are needs and which are wants. You might ask, "Do we need milk? What about cookies?"
Give your child choices.
When you're shopping with your preschooler, let him pick out one special treat. With a slightly older child, you can broaden the options. You might give him $4 to spend in the grocery store as he pleases (though you should retain your veto power). Don't cave if he goes over the budget and pleads for an extra dollar. "You need to set limits, or your child will think there's an endless supply of money," says Dungan.
Share shopping strategies.
If you're buying a new TV, let your child know that you're willing to spend more for a model with a sharper picture. But mention that you buy, say, generic yogurt because it costs less than the name brand and you like the taste. Your child will also learn from the times you decide not to buy something. "If you say, 'I'll wait until it's on sale,' you're modeling a positive way to control your impulses and make smart decisions," notes Jon Gallo, who cowrote The Financially Intelligent Parent.
The Lesson: Keep your money for special things.
Explain saving along these lines: "Every month, I set aside money for stuff we'd like to have or do in the future. Eventually we'll be able to buy a new car or go on vacation." Then help your child develop his own saving goals. Avoid steering him toward something long-term (like putting away money for college). "At 6, he can't be expected to wait longer than a month to get what he wants," says Karyn Hodgens, author of Raised for Richness.
Read stories about money.
Finance-themed books can engage and inform your child. Alexander, Who Used to Be Rich Last Sunday shows how easily a dollar can slip through your fingers. In The Berenstain Bears' Trouble With Money, Brother and Sister Bear find the middle ground between being spendthrifts and misers. You can also try Sluggers' Car Wash, in which the players raise money together to buy team T-shirts.
Track her savings together.
Storing coins in a jar is fine, but your child can chart her progress far more easily if you print out a coin sheet under "free resources" at kidnexions.com, a financial-tools site. Then you can have her color in every coin she collects until she reaches her goal of, say, $5.
Play online games.
Practicalmoneyskills.com, Visa's financial-literacy website, has a host of free activities to boost coin recognition and other money skills (ages 5 and up). Also visit thegreatpiggybankadventure.com, where kids direct "truffles" to their piggy bank, saving until they meet their goal (ages 8 and up); and orangekids.com, where they earn and invest pretend money during an out-of-this-world trip to Planet Orange (ages 6 and up).
Fun resources for teaching kids spending skills:
The Lesson: Borrowing costs money; saving earns it.
Compare a loan to taking out a book from the library and then returning it. But make this distinction: When you borrow money, you have to pay back what you owe plus an additional amount. That's why you should only take out a loan when you're buying something that you need and can't afford to pay for all at once, like a house. You might add that keeping your money in the bank is like lending it. In return, the bank pays you interest, which makes it worth more.
Boost your child's interest.
Take your child to the bank to open a savings account. Or, since rates are so low right now, you could offer to pay her, say, 10 percent interest to keep it with the Bank of Mom. This will give her a clear idea of how money makes money -- and an early clue that some investments are more profitable than others.
Play a board game that pays off.
Crista Carnes's sons, Keaton, 8, and Carson, 10, love competing in Bank It! ($34; simplyfun.com). "It incorporates savings, interest, spending, and even giving," says the mom from Highlands Ranch, Colorado. You might also try Loose Change ($15; mindware.com), which has players collect coin cards that add up to exactly one dollar, and Money Bags ($19; learningresources.com), where the object is to earn cash by doing chores as you navigate the board.
Start talking about investing.
Let your child know that making your money increase is crucial because prices for most things go up over time. One way to do this is to buy a small slice (called stock) of a big company like Disney. If it sells lots of toys, you get a share of the money it makes and your stock goes up in value. If not, its price may go down and you'll lose money. That's why many people invest in different companies. It's worth picking up the Money Savvy Piggy Bank ($17; amazon.com), which has the usual compartments for saving, spending, and donating, plus another one for investing. Once your child seems ready, choose an appropriate place to invest some of his money together. Couldn't you have used that lesson as a kid?
Originally published in the March 2011 issue of Parents magazine.
Fun tools that teach money management: