Money makes the world go around, and yet it's an often misunderstood topic among young adults. When left to make mistakes and learn the hard way, most of us end up fairly informed of basic money principles. Ideally, however, basic personal finance principles should be taught early and often. Here are some general guidelines for what to teach your child, and when. TUTORIAL: Budgeting Basics
The Toddler Years (Ages Two to Four)
From the time children can begin speaking short sentences, they can understand what money is. They may not grasp the economics of it, but now is a great time to start calling each individual coin by its name. Parents will also want to encourage responsible handling of money (for kids over age 3 only), by asking that kids don't put the money in their mouth, and to remember to use proper hand washing techniques after handling. (For more, see 5 Financial Lessons You Must Teach Your Kids.)
Preschoolers / Kindergarten (Ages Four to Six)
Now the excitement of teaching how money works can begin! In addition to helping children identify each bill and its value, parents can roleplay cash transactions by setting up a pretend grocery store or other fun scenario for kids to practice buying, selling and making change. Kids at this age also understand that money has a value. If they begin asking for items in the checkout line, explain that it will take $X to buy it. You will also want to encourage kids to save birthday money or other cash gifts in a safe place for later purchases or investments.
At this age, children are mastering basic math skills, and they should be competent at understanding the value of each coin and bill. This is a perfect stage to begin giving kids an allowance - 25-50 cents per year of age is commonly recommended. Children who ask for frivolous extras should be steered toward using their own funds, and they can also help to shop for groceries and other necessities. Coupon clipping, in-store price comparisons, and paying the cashier at the end of the trip are all appropriate ways to involve children and teach them future life skills. Kids can also begin sorting their money into three categories for spending, saving and giving to charity. (For more, see How An Allowance Helps Kids Get Money-Smart.)
Children of this age are very aware that money buys pretty much anything. They are starting to grasp more complex issues surrounding the dollar, however. Taxes, unemployment, minimum wage and other more mature economic topics are being discussed in the world around them, and parents should take the opportunity to address these sticky subjects before they are allowed to scare children or cause them to cower away from a financial education. Kids are also capable of learning about the perks and perils of credit cards, loans and mortgages. Without getting too complicated, parents can address the basic language of borrowing and interest in a way that will also teach responsibility for repaying debt. (For more, see It's Never Too Early To Start Saving.)
Many kids will learn some basic financial principles in life skills and accounting classes, but for those children who opt-out (or who do not have these types of classes offered), parents should create a curriculum of their own to relay this type of information and to help bolster what they are learning in school. In addition to basic principles of how savings, checking and loans accounts work, kids should be able to write checks and reconcile statements manuals – not just with software.
At this age, many students have already secured funding (often with their parents' help) for a higher education, car or apartment. Even if your college-aged child appears to have everything under control, it is a good idea to check in to assess their financial health every few months or so. Ask questions about their accounts, specifically, if they have any late payments and whether they understand new laws concerning credit or repayment. Avoid bailing your child out for unpaid bills, however. This is where they will learn responsibility for the rest of their lives. (For more, see 8 Financial Tips For Young Adults.)
The Bottom Line
Parents have a tough job that can't be taken lightly. If the task of teaching financial literacy to your child has you confused or worried, check out this list of financial resources designed to give kids of all ages the best start.