Dollar Wise Kids

Recently, it seems that a lot of the conversations in our household revolve around money matters. They're usually aggravating back-and-forths filled with pleading, misunderstandings, and even the occasional tears. But don't get the wrong idea. The trouble isn't between my husband and me over making our mortgage payment. No, all the drama is with our 7-year-old son, Nicky. And it's over issues like why we can't drop everything and run to the store to get the latest Silly Bandz, magic card, or 3-D Rubik's Cube. I mean how many times can you explain that: a) our family doesn't have a bottomless well of cash and b) even if we did you still can't get everything you want, the second you want it?

It turns out that our family isn't alone. By the time they reach first or second grade, kids aren't just eager consumers, they're also increasingly curious about how much toys, games, movies -- even cars -- cost. Yet most 7- and 8-year-olds' idea of fiscal resourcefulness is to ask (or beg!) you for money. It shouldn't be that way, experts say, because doling out dollars whenever your child asks isn't only hard, especially in a challenging econ-omy, it also encourages kids to be impulse spenders and poor money managers.

It's not just your child's avid interest in getting and spending that makes this age the ideal time to start imparting money sense. She's also likely learning about currency and coins in school as part of her math curriculum, so money and how it adds up is less of an abstraction. Capitalize on this shift by teaching valuable money-management skills at home.

The best way to teach the value of money is to give kids some of their own, so initiate a weekly allowance. Just how much is a personal matter, based on your financial circumstances and the going rate where you live. "If possible, start with an amount that's equivalent to half your child's age ($3.50 for a 7-year-old, $4 for an 8-year-old)," suggests Janet Bodnar, author of Raising Money Smart Kids. All the experts I spoke with cautioned that an allowance shouldn't be contingent upon meeting routine expectations such as unloading the dishwasher or feeding the dog. "It's important to teach children that doing chores is an expectation for everyone in the family," says Mary Gresham, Ph.D., a clinical psychologist in Atlanta. "If you want to give your child the opportunity to earn extra money -- by raking leaves or washing the car -- that's fine, but make it a separate transaction."

Don't just hand out cash. Help your child set goals for her money. Does she have her eye on a Wii or (yikes!) tickets to an upcoming Justin Bieber concert? Get out the calculator and explore various saving scenarios together. Some kids are naturally thrifty and will want to sock away every penny, while others are the spendy type. Both styles have virtues, and consequences, so allow her to experience her chosen approach. Giving your child her own money will also encourage independence and give her a measure of freedom. In keeping with that spirit, try to take an advisory role. "An allowance should have relatively few strings attached to it," says Lawrence Balter, Ph.D., a psychologist and parent educator in New York City. After all, that's how she's going to become a savvy consumer. Even if you think your child is frittering away her money, take a deep cleansing breath and try to let it go. Buyer's remorse can be a useful lesson. But you can and should set some limits. If something is against your rules or beliefs, don't accept the "it's my money" retort. Things like World of Warcraft (too advanced), skateboards (too dangerous), or a hamster (too much responsibility) are all examples of perfectly acceptable places to draw the line. Similarly, if you don't allow unlimited candy or soda, having an allowance shouldn't give your kid carte blanche to disobey your family's rules.

Your child is watching how you and your partner handle money-related issues. Whether you make big-ticket impulse purchases or debate, discuss, and comparison shop before you buy anything, how you deal is how he'll learn. "If you want your kids to save and invest, they need to see you do it," says Elisabeth Donati, creator of The Money Game and C.E.O. of Creative Wealth Intl., a financial-literacy company that provides tools and resources to families across the U.S. and internationally. Be mindful, however, that so many financial transactions are abstract. From the swiping of a debit card to automatic online payments, you have a lot of explaining to do so that your child understands the cold-hard-cash connections. Begin by pointing out how things work. For example, when you charge something, point out that you're spending real dollars. Follow up by letting your kid look at relevant parts of your monthly statement so he can see, for example, the charges for tickets you bought when you went to the movies or the last big trip to the supermarket. The more familiar he becomes with what's going on behind the scenes, the less vague the entire process will be. Also be aware of finance-related fights. If the whole topic seems fraught, your child may get the impression that the best fiscal strategy is to avoid conflict with secrecy or silence.

Let's face it, who really wants to be asked, "How much does our house cost?" or "How much money do you make?" over dinner by a 7-year-old. The best approach is an even-keeled response. Don't feel compelled to name your salary, but try not to shut down the conversation either. "Kids lack a frame of reference, so if your answer is $30,000 or $130,000, neither would be meaningful," says Bodnar. She suggests offering a more general statement of reassurance, such as "We have enough to live comfortably and buy the things we need for every day." When it comes to spending decisions, get into more specifics and share some of your reasoning. "Kids this age often think that since you're a grown-up you can have anything you want," says Dr. Balter. "There are big benefits to explaining how you didn't buy something you wanted because it was too expensive. They should hear about how you have to wrestle with difficult decisions like that."

Finally, make the learning fun. Play board games together that involve money, such as Monopoly Junior, Payday, The Game of Life, and The Allowance Game. "These are money-management courses in a box," says Bodnar. Between real-world experiences and pretend-cash crash courses, you'll decrease your chances of raising a big spender while investing in helping your child become a savvy money manager.

Originally published in the November 2010 issue of Parents magazine.