Money: Teaching kids about money

Enlarge Image Image Gallery It's important to teach your kids financial responsibility and make sure they know "money does not grow on trees." James Steidl/Fotolia

“Kids are surprisingly aware of what’s going on in the world,” says Eric Tyson, author of Personal Finance for Dummies, 5th Edition (Wiley, $21.99). “And if they don’t know that times are a little bit tough, and Mom and Dad are having to watch their spending, it’s time to tell them. Sheltering kids from financial realities does them no favors.”

A good grasp of personal finance is one of the most valuable skills a person can have, and while previous generations may have been raised with the constant admonishment that “money doesn’t grow on tree,” too many parents today neglect that lesson. Now is the time to change that, and the economic crisis we’re in provides a great incentive for doing so.

“In many ways, a long-term financial slowdown can be a blessing in disguise,” says Tyson. “It leads families to make a budget and stick to it. It forces them to be conscious about how they handle money. That’s good for kids. It shows them how the world is supposed to work.”

Here are a few helpful hints for teaching kids about finances:

Tell them the truth

Kids are perceptive. If you’ve been on edge lately, they’ve noticed. Rather than let them wonder why you’ve been working so much or constantly talking about money, explain to them, on their level, what’s going on in the family’s finance world.

Explain how much things cost

Kids might not understand that hot water costs more than cold water, or that turning up the heat results in higher power bills. This exercise will teach them how to conserve and help the family save money. You can also pile up all the bills for the month and have them look at the amount due on each one. Show them what the family’s cost of living is, and reiterate the areas where they can help reduce the costs.

Realize that kids learn what they live

Parents are their kids’ most influential teachers in life. When you ring up a huge credit card debt, take out mortgages and loans, and fail to save anything, that’s what kids come to see as normal. If parents model unhealthy financial habits, they can’t expect their kids to “do as I say, not as I do.”

An allowance is a great teaching tool

A allowance program can mimic many money matters adults face every day. From recognizing the need to earn money to learning how to responsibly spend, save and invest their allowance, kids can gain a solid financial footing from a young age.

Start them saving and investing early

Have your kids save a significant portion of their allowance toward a long-term goal, such as college. Tyson recommends kids reserve about one-third of their weekly allowance for savings. As they accumulate more significant savings over time, introduce them to the concept of investing.

Reduce their exposure to ads

Cut down on TV time, because when kids are watching TV, they see tons of ads for toys, games, etc. When they do watch TV, put in a movie. If they do see an ad and start talking about how much they want the product, explain to them that there’s never a good time for frivolous impulse spending, adding that it’s especially harmful when money is tight.