Childhood is such a great time of life. Many lucky kids are able to be taken care of in terms of food, shelter, clothing, and school, all the while being able to play with friends and toys. Given how special childhood is in the life of a person, parents often face the dilemma, in many situations, of how and when to shelter their kids from “real” life. After all, childhood is a time of fun and innocence, right?

Questions such as this often come into play when it comes to money and kids. While questions can take various shapes and forms, they can be summarized with the overarching question: “How can you teach kids the value of money, so they learn to be financially responsible adults later in life?”

As a parent of a 6 year old child, I’m early in the game. She’s too young to understand and fully appreciate the value of money. My daughter, like many other girls her age, likes toys. But its not just toys she likes – it’s also books, movies, arts, crafts, etc. Thinking about fun usually comes first for kids, and thinking about financial constraints does not. That said, I am committed to raising her in a way that she appreciates the value of money, and is ultimately a very responsible young woman later in life. To that end, I have been working on setting the foundation for this future.

Here are my tips for getting started with teaching young children the value of money:

1) Explain how money is earned. It seems obvious to us, but kids don’t intuitively understand. One of my friends shared with me that his 8-year old thought money came from ATM machines – whenever you needed more, you just went to the machine! I have tried to teach my daughter than we get money by earning it. When I do work, I get money. If I don’t, I won’t get money. This simple way of putting it makes it clear, without confusing them.
2) Explain how we acquire “things”. Most items – be it a car, furniture, food…and yes, toys – cost money. Thus, if we want something, we must use money.
3) Give an allowance. A small allowance for a child will teach them that the limit to what they can spend is what they have. I am not an advocate of linking household chores to money, as these are things that we all need to do and don’t get directly paid for anyway. There are pros and cons to this, but my approach is to have kids view this as we would view a “salary”.
4) Link basic math to money. My 6 year old has had some math exercises at school where she is shown pictures of different coin combinations, and she has to write the number that corresponds to the cents displayed in that combination. This equates money to quantifiable, numerical units – and makes it more real, in a language that they are beginning to understand. They know at 6 years old that 3 plus 2 is greater than 3 plus 1, for example, so by extension they realize that 5 dollars are more than 4 dollars. I reinforce this in some of the supplemental work I do with her at home.
5) Comparison shop with them. When they go to a store, they can compare how one product costs more than another. For example: why does one toothpaste cost $3.99 and another cost $2.99? Why pay $1.00 more – are you getting anything extra for that additional $1.00? When these questions are asked, as they understand math, it offers examples of how to make wise decisions when it comes to money.
6) Translate savings into “things”. To take it a step further, I link the savings to something she likes, such as a stuffed animal from Build-a-Bear (what an interesting business model, by the way). She can see how purchasing one toothpaste over another could save $1.00, and saving $12.00 through different purchasing decisions could allow for a nice new stuffed animal to be purchased.
7) Introduce the concept of the time value of money. Compounding, of course, is a critical concept in personal finance. One can “introduce” this concept by simply giving an example such as:  “if you have $100 and you don’t spend it, after one year it might be $105. So instead of 100 sticker booklets, you could get 105 sticker booklets” (not that anyone needs that many, but you get the idea!). This gets a kid motivated to save money. I have described this type of example to her as showing the value of “investing.”

Has this worked? Recently, when we were in a bookstore, she was looking at books and wanted to buy something that cost $15.99. On her own, she said, “I can just buy this book for $4.99 and then (pause, as her mind is working to do the math) I can save $11. I like the book that’s $4.99 better anyway.” I told her I that I thought she was making a wise choice, and asked her what she could do with the $11 that wasn’t spent, and she smiled and said, “Save and invest!”

Needless to say, as someone who has a personal finance blog, I was pleased 🙂

I have to confess, I ended up caving and bought her the $15.99 book anyway! That smile of hers just took my heart away (as if that wasn’t the case anyway). The way I see it, she has been learning her lessons well – and besides, childhood is a time of fun and innocence, right? We can teach lessons, but can’t be frugal all the time!

This post was included in Carnival of Personal Finance #255 at Well-Heeled Blog.