Raising Financially Savvy Kids

Kids learn everything they know about money from their parents. So it's within your power to raise financially savvy kids if you follow your common sense and these tips:

Start early. Most financial experts agree that children have a sense of money as early as age 3. Parents who don't tackle the issue by preadolescence are probably putting their kids at a serious disadvantage. By junior high school, kids should not only have a sense of spending and saving, but also about budgeting and credit.

Create a sense of responsibility. Your earliest talks about money should tie goals to a plan of action to achieve it. If your child has a hobby or dream purchase, use this as an opportunity to put him in charge of his own choices and to teach him the value of having a financial goal. Most experts agree that once you provide your children with the means to money—through an allowance, family gifts, or chores around the house—they need to have the freedom to decide what to do with it. Otherwise, the lesson on responsibility is lost. But they also need your guidance to help them consider worthy goals.

Be open about family finances. If you include your children in the budgeting process, they will understand the tradeoffs that you must make in everyday life: Should we take a modest vacation and put extra funds toward a sporty family car? Or, should we make do with the old clunker and opt for an expensive getaway? Children who participate in the decision-making process are less likely to feel entitled or deprived.

Encourage savings through personal example and incentives. You can demonstrate the power of putting away a certain amount of money each week toward a special goal, track progress toward the goal, create excitement, and then share the joy of achievement when the goal is met.

Teach savings in steps. Once the notion of savings is introduced, you can broaden the discussion to talk about the difference between saving and investing, compound interest, and long-term goals such as retirement and college. When your kids are old enough to have their own personal goals, encourage them by offering to match their savings to achieve an ambitious goal. Better yet, once they start earning money, agree to match their savings dollars in a Roth IRA. Save $200 a year in a Roth IRA when your child is between 12 and 21, and you can help them build a tax-free nest egg of more than $211,000 at retirement if the money compounds at 10 percent.

Turn mistakes into valuable lessons. Help your kids learn from their mistakes. If your son squanders his allowance on day one, suggest some strategies for making it last come next pay day. Don't scold him—you'll only make him reluctant to discuss his money issues with you down the road. But don't advance him extra money in between. He should feel the pinch. Better yet, if you can see the mistakes coming, try to intervene.

Teach the proper use of credit. Before you decide how you will approach the issue of credit, look at your own habits. They will probably influence your children more than any other thing you say or do. Whatever you do, it's important not to back away from the issue. Let them see your own card statement. Explain to your child that credit cards are not free money, and how interest accrues when you don’t pay a balance off. There are a number of online calculators you can use to illustrate this.

Allowance is a strong teaching tool. If you want to teach your children about managing money, some experts feel that you should not link allowance to chores on the theory that children should be required to pitch in without associating a dollar tag with every little effort. Yet, others believe that using an allowance as a payment for duties around the house can teach kids that they don't get something for nothing. Perhaps the best approach is to find some middle ground: An allowance, plus extra pay for work above and beyond regular household chores can reward your ambitious child without penalizing a less materialistic sibling. A Consumer Reports survey also showed that children who receive regular allowances were twice as likely to earmark money for savings and charity than those whose parents gave them spending money on a less formal basis.