It's crucial for kids to be financially literate. So open your books and teach them how it all adds up.

Money Takes Work

Don't be amused if you ask your 6-year-old where money comes from and he tells you "an ATM." While that might be a cute answer from a preschooler, by now your child should be a little more financially savvy. "You should start teaching kids serious lessons about money by the time they're in elementary school. You're behind the curve if you wait much longer than that," says Daniel A. Mica, president and CEO of the Credit Union National Association, in Washington, D.C., one of several organizations that are promoting programs to teach "financial literacy" to young children. Certainly by age 6, kids are capable of understanding basic financial principles. "If you don't tell them about the importance of earning, budgeting, and saving, the only message they'll get will be to spend, spend, spend," says Paul Richard, executive director of the nonprofit Institute of Consumer Financial Education, in San Diego. Begin to build your children's money smarts with these simple lessons.

Kids should understand that parents work hard for their money. Explain to your child that you earn money that goes into the bank, and that when you use an ATM or write checks to pay bills, the money comes out of your account. Encourage your child to ask questions -- money shouldn't be a taboo topic. But draw the line at revealing your exact salary or any of your financial concerns. You don't want your child worrying about the bills or feeling guilty that he costs you so much. Also: Don't give kids a negative impression about work. Make sure the message comes across loud and clear that it's not only about the Benjamins; instead, emphasize that you're lucky to be able to earn money doing something you like or that helps other people.

Shop Carefully

"The easiest way to teach kids about money is by being a good role model," says Mica. "If kids see you spending wisely, they'll be more likely to follow your example." When you're in the supermarket with your child, enlist her help comparing prices of various products (brand-name versus a store label, for example, or a sale item versus something regularly priced). As her math skills develop, show her how unit pricing works so she'll see that you get a better deal when you buy in bulk. It's also a good idea to explain that products that are heavily advertised tend to cost more.

Stick to a Budget

To teach that there are limits on spending, talk to your child about the concept of budgeting. Explain that your income goes to paying for all of the things you need (the house, food, a car) as well as some of the things you want (vacations, restaurant meals, a flat-screen television). "Distinguishing between needs and wants is the first step toward developing financial discipline," Richard says. You should even involve your child in a basic budgeting exercise: When planning a birthday party, for example, give your child a calculator and let him figure out the various ways you can spend, say, $100. This will help him understand that, when it comes to money, there are always trade-offs.

Cards Are for Convenience

When you use plastic, don't let kids think you're spending money you don't have -- even if that's the truth. Instead, explain that credit cards are more convenient than cash but that you need to have the money to pay the bill when it comes at the end of the month. Tell them that if you can't pay the bill, the bank will lend you the money but that you'll have to pay a lot when it does this. Here is an opportunity to teach kids that things end up costing much more if you have to borrow money to pay for them.

It's Smart to Save

By now, your child is ready to move beyond the piggy bank, so you should take her with you to open a bank or credit-union account in her name. Encourage her to deposit a portion of her allowance as well as any money she receives as a gift. (Some experts also advise teaching kids to contribute at least a portion of their money to a charity.) At the end of each month, show your child her bank statement to teach her about compounding interest. This will help her see the benefit of putting money away and, hopefully, will set her on the path to a sound financial future.

The Great Allowance Debate

Giving your kids an allowance is a good way to teach them basic financial skills -- and the value of money -- from an early age. But should you tie the payout to chores and responsibilities?

Pro: Paying for chores teaches your kids the real-world relationship between working for something and getting paid for it. Your kids won't think they get money for nothing.

Con: They might expect you to pony up every time they're asked to do something around the house -- instead of learning that certain responsibilities are just a part of being a family.

Copyright © 2007. Reprinted with permission from the August 2007 issue of Parents magazine.

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