Even before your children can count, they already know something about money: it's what you have to give the ice cream man to get a cone, or put in the slot to ride the rocket ship at the grocery store.  It is never too early to introduce your children to money and help them build good lifelong financial habits. 

Start the Discussions

When your child reaches age 3 or 4, you can start explaining some of your shopping decisions at the grocery store: “We're buying this cereal today because it is on sale," or "We're using coupons from the newspaper to help pay for your crackers."  Choose your words carefully when talking about money. Instead of saying, “No, we don’t have money for that” (which may or may not be true), say, “We choose not to spend our money on that.”

At home, teach your preschooler to distinguish among pennies, nickels, dimes, and quarters, and explain that each has a different value.  Empty a coin purse on the floor and have them sort the coins into piles. Tell them how many of each kind adds up to a dollar.

Don't be surprised if your child asks where the family's money comes from.  If possible, take them to your workplace and explain that you receive money for the work you do there.  No matter what your income, let them know that the family's money supply is limited and should be spent carefully.

Time For An Allowance?

Once your child is in elementary school, consider giving them an allowance to teach them how to save money and budget for the things they want.  Kids who aren't on allowance don't have consistent income; it's difficult for them to set goals, budget, and save, because they don't know how much money they'll have each week or month.   

Some parents expect their child to earn an allowance by doing household chores, while others attach no strings to the purse and expect their child to pitch in simply because they live in the household.  A compromise might be to give your child a small allowance, coupled with opportunities to earn extra money by doing chores that fall outside their normal household responsibilities.

To calculate an allowance, start with the expenses it must cover. Young kids might be required to pay only for treats; as they get older, you might have them budget for such things as movie tickets, clothes, and phone charges.  A fair allowance should be enough to cover "needs," with a reasonable amount left over for "wants."

Savings and Goals

While young children might want to spend all their allowance now, encourage them to divide it up into three jars: money to spend now, money to put towards something they can’t afford yet, and money to give to your church or a local charity.  Consider labeling the three jars “Money for God,” “Money to Save,” and “Money to Spend.”  As an incentive, you can offer to match whatever your child puts in their “Money to Save” jar. 

Don't be afraid to let your child make mistakes.  If a toy breaks soon after it's purchased, or doesn't turn out to be as much fun as seen on TV, eventually they will learn to make good choices even when you're not there to give them advice.

Look for future articles from me about teaching money management to your middle school tweens and high school teens.

Adam Obrecht, CFP® is the owner and founder of AO Wealth Advisory in Waukee, Iowa.  His life passion is helping individuals, families and businesses maximize what they earn, invest wisely, and give generously to their family, charities, and community.  Adam is on Facebook and Linked-In.  Adam lives in Urbandale with this wife and two boys.

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