By age three, most kids comprehend that money can be exchanged for something they want. Kids see you pull out your wallet to pay for things such as food, toys, books and the babysitter. Because children are exposed to this frequent exchange of money for stuff, they understand at a very young age that money can be used to buy things they need and want (more on needs and wants later in this tutorial). What they might not understand is what exactly money is and how it ends up in your wallet.

Explain to your child that before there was money, people used to barter or trade with each other to pay for the things they needed. Items such as animals, food, seashells and beads were used to barter, and people had to agree on what made a fair trade: how much of one thing could buy how much of another. A dozen eggs, for example, may have bought a loaf of bread, while 10 chickens may have bought a pig.

While bartering was effective and allowed people to pay for things they needed, there were some flaws with the system:
  • The items used for bartering weren’t always easy to carry around. Ask your child: "Can you carry a cow or several chickens in your pocket?"
  • The items weren’t always easy to divide. Money must break down into smaller amounts to be useful. Ask: "Is a cow for a loaf of bread a fair trade? How could you trade part of a cow?"
  • The items may have rotted, spoiled, broken or otherwise become worthless. Ask: "How long do eggs last? How much is your bread worth if it’s moldy?"
Because bartering was difficult, people needed an easier way to buy the things they needed, so gold and silver coins were made. Coins solved many of the problems that came with bartering: coins were easy to carry around, came in various denominations (different coins were worth different amounts) and kept their value over time.

Point out to your child that money comes in all shapes and sizes and is used to pay for everything. Most countries have two forms of money: coins that are made from metals and bills that are made from paper. In the United States, we have a variety of coins and dollar bills, and each is worth a different amount. It is helpful for children to see all the different coins and bills so they can compare sizes, shapes and colors. Learning the names and values of each coin and bill takes practice. It’s okay to simply explain to very young children that each coin and bill has a special name and is worth a certain amount of money. Older kids can learn the names of coins and the corresponding values:
  • Penny = 1 cent
  • Nickel = 5 cents
  • Dime = 10 cents
  • Quarter = 25 cents
  • Half-dollar = 50 cents
Older kids can also be taught that different coins can make the same amount of money. For example, you can make one dollar with:
  • 100 pennies
  • 20 nickels
  • 10 dimes
  • 4 quarters
  • 2 half-dollars
  • 2 quarters + 5 dimes
  • 1 half-dollar + 1 quarter + 5 nickels
There are a number of "games" you can play to help your child learn to recognize the various coins and dollar bills:
  • Give your child a pile of coins so they can sort the different coins into separate piles. Make sure they notice that the coins have different sizes and colors.
  • Once the coins are separated, explain what each type of coin is called and how much it is worth. It is helpful to associate the coins with what they could purchase: "This coin is called a quarter. It is worth 25 cents. One quarter could buy a gumball. Ten quarters could buy a box of crayons."
  • Ask older kids (who know the basics of counting) to show you different amounts of money using the coins: "Show me how to make 30 cents" or "What coins would I use to pay for something that costs 55 cents?"
  • Show your child dollar bills of various denominations and allow them to look at each one. Have him or her note that, unlike coins, the dollar bills are the same size and shape, but they have different values depending on what appears on the bills.
  • Ask older kids to show you different ways to make $1.00, $1.50, etc. so they can practice using the coins and bills.
  • Use coin wrappers to make rolls of coins. Many banks give coin wrappers out for free, or you can purchase an assortment at stores that sell office supplies and stationery. Help your child count the correct number of coins for each roll and explain what each is worth
  • After practicing, allow your kid to count out coins and bills to pay for a small purchase at the store. Keep in mind this may take a while, so it’s more fun for everyone (you, your child, the cashier and other customers) if you plan on going to the store when it won’t be busy.
Other Ways to Pay for Things
While the concept of credit may be a stretch for most little ones, you can explain to kids that people can buy things even if they don’t have coins and dollar bills with them. People also use credit cards, debit cards and checks to pay for things. It is important to help your child understand, however, that credit cards and checks are not free money and that you have to "pay back" the money with real coins and paper bills that you have worked to earn.

Next: Teaching Financial Literacy To Kids: Earning Money »

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