A friend of mine, the mother of a 10-year-old, recently asked me for advice. "My husband and I have started to give our daughter an allowance," she said. "But frankly, I don't know how to teach her what money really means. What does she need to know? And what should I do?"
As we talked (and, needless to say, I was full of advice on this topic), I realized she wasn't asking about the nuts and bolts of personal finance, though that is a subject that everyone needs to master. She was asking me about money in the larger sense, or how to teach her daughter what used to be called "the value of a dollar."
In this two-part article, I discuss ways you can instill good financial values in your children. Part I is about spending, saving and working, while part II is about charity and philanthropy. The reality is that they're not going to learn this stuff in school; it's up to you. Be prepared to give them experience with money as they grow up. And remember that you're setting an example for them every day.
THE VALUE OF EXPERIENCE
My friend was on the right track when she started giving her daughter an allowance - every kid needs hands-on experience with money - but she needs to go a bit further. She should make it clear what her daughter is expected to do with her weekly pocket money, which at that age boils down to two things: discretionary purchases and saving.
Saving for the future comes first, and the earlier the habit starts, the stronger it becomes. Encourage your child to save 10 percent to 20 percent of his or her allowance; you might even offer an incentive to encourage the habit. Some parents offer to match, dollar for dollar, whatever portion of the allowance a child saves. If your kids are very little or the amounts are trivial, a piggy bank is fine; however, once a child has, say, $100, open a savings account at your bank. Let the child make the deposit and see the amounts add up with interest.
As for spending, let your children be consumers, using it as a learning experience. Teach them to distinguish between needs and wants. Make them save for something that allowance for a week won't cover. And don't be afraid to let them make mistakes. When they're using their own money, most kids learn quickly about being good (albeit small-scale) shoppers.
As your kids get older, their allowances as well as their spending responsibilities should grow. They should be paying when they go to the movies with their friends or go out for a special treat. When they enter the teen years, help them learn to budget their money and encourage them to save for bigger-ticket purchases. This is, after all, exactly the skills they'll need when they become adults.