If your goal is to set your child on the right path financially, it is not as simple as just giving them money. Teaching them the proper tools of money management is just as vital, and this includes connecting money to your child's reality. Read on for some simple tips on how to give your children the practical knowledge they need to make smart decisions down the road.

The Challenge
Giving a young child an allowance and keeping him on an enforced deposit plan will not teach him everything he needs to know. The purpose of that savings account will come into play when your child is old enough to decide on his own financial goals. In the mean time, you need to make the connection between that money and your child's reality. This task will require diligence and more than a little cunning. Credit card companies have proved that most adults cannot connect money and their reality, so it may seem twice as challenging when you are trying to teach those ideals to a child.

The most frequent error that parents make in connecting money to their child's reality is acting as the "friendly" bank. When you buy something at your child's request, be it a bike or a pack of M&Ms, it is important for you to realize how he or she perceives it. Is money something you just magically pull out of your pocket whenever your child asks? This is a bad precedent to set. (To read more about this, see What Are You Teaching Your Kids About Money? and Use Allowances To Create Financially Sound Kids.)

Turn Simple Chores Into Lessons
Most children get caught up in the candy rack/kid trap near the till at the grocery store. Children, to their credit, are troopers - no matter how many times you refuse to buy something from that rack, they will never stop asking. Conversely, if you buy something from the rack once, they will take it as a sign of hope for future success. As such, shopping with children usually reminds parents of how peaceful life can be when you are shopping alone.

You definitely don't have to lock your children in the car or leave them at home though - there is an alternative. Challenge your child. Explain to her that you have a limited amount of money to pay for the groceries. Take out a piece of paper and write down part of your shopping list. Give your child a set amount of money and let them keep the change if they can buy all those items under their given budget. If they choose, they can use that money to buy candy, or they can save it for later. They will connect the money in their hands with the food that fills the cart. They will learn to be thrifty because there is an immediate reward at the end. Simple chores like this one can help reaffirm any monetary lesson you might have tried to teach them before.

The Best Rewards
It is OK to treat your child, but you have to create the context in which it would be proper. There are many schools of thought on this, but many suggest that the best method is to treat both of you. If your child does well on a test and you want to give her something more than just, "I'm very proud of you," don't just give her cash. Physically take her out for ice cream and have some yourself, or watch a movie together, or do something else you both enjoy. It is your presence and appreciation that make it special, not the money spent. In the proper context, the monetary gifts you give aren't your child's focus - your love for them is.

Learning About Loans
If your child can't live without a new bike, designer jeans, or a brand new game console, it may be time to teach him or her about credit. Even now, easy credit in the form of charge cards is available to teenagers, so the earlier you can teach this lesson, the better your child's chances are of avoiding a future of multiplying credit cards and high interest debt.

To head off credit card companies, you can act as your child's first creditor. When he has decided on a big-ticket item to purchase, take him out to shop around for the best price and then set the terms of the loan.

This works best if you truly act like a bank and request a loan application - a statement of your child's savings, income and any investments, as well as a detailed repayment plan. The repayment plan should detail how much the monthly payments will be and for how many months.

Depending on how much interest you are charging, you can break the payments into how much is paid to you and how much of the principal is paid down with each month. Make sure that you both sign the loan agreement and have some consequences for non-payment (unpaid labor - also known as additional unpaid chores - is always a good fall back).

The loan, presumably given at a soft interest rate, will give you a stepping stone to point out the lopsidedness of credit cards when your child wants to apply for one. He will be more hesitant to get into the habit of charging things once he realizes that he may end up paying for something twice over.

With respect to loans, it is important that you try to differentiate between good reasons and bad reasons for getting one. For example, a loan to buy a bicycle with the intention of doing a paper route is a good reason, whereas a loan to buy a video game console that will probably never pay for itself is a bad reason and is something your child should save up for in advance.

The purpose of connecting money to your children's reality while they are young is not to create a miser who fears credit. Rather, you are trying to instill some financial common sense that will allow your children to thrive in an increasingly whimsical world of, "buy now, pay forever."

To keep reading about kids and finances, see Close The Bank Of Mom And Dad, Teach Your Child About Investing and Teaching Your Child To Be Financially Savvy.

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