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: