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How to Teach Kids About Money

You don't have to be Warren Buffett to raise a financially savvy kid. You don't even have to be good at math. The key? Establishing a conversation about dollars and cents -- and keeping it going as your child grows. Parenting and the National PTA team up to get you started.

"Do you mean a bank could steal their house?"

Of all the unsettling questions I thought my girls might ask as they grew up, the definition of bankruptcy and foreclosure was not one I anticipated. But one night last spring, as my husband and I were gossiping at the dinner table about the toll the economy had taken on our small town, my 10-year-old piped up with her query. Suddenly, I was explaining the basics of overspending and loans, getting a clear picture of how little my fourth-grader understood about either, and realizing how uncomfortable and unprepared I felt tackling the subject with her.

My unease, it turns out, is absolutely typical. Studies show that most parents feel the same way talking to kids about money. Unsure of their own financial skills, wary of playground blabbing, or having been taught that dollar talk is unseemly, many assume the schools will teach their kids what they need to know. Problem is, fewer than half of the states in the country require schools to provide any kind of instruction in personal finance at all. And in fact, experts say, teaching kids about money has to be a joint effort -- with the heaviest lifting coming from the home front.

"Schools can teach our kids about how to calculate compound interest and how to do the math required in their finances," says Neale Godfrey, the best-selling author of many books on financial management, including Money Doesn't Grow on Trees. "But, ultimately, how you manage your money is a values question. Only parents can -- and really should -- teach that."

The good news? You can begin a dual strategy of both showing and telling your child about budgeting, saving, and earning the moment he's old enough to understand that money is traded for things -- a realization that is well entrenched by kindergarten. From the list below, pick the strategies and activities that workbest for your family. They're listed roughly in order of age group, from those for the very young to older kids, but many can be adjusted up or down.

Gab About Gotta-Have's: Advertisements -- on billboards, in magazines, or on television -- offer an easy avenue to discussing the most basic (and yet amazingly tricky) financial concept, one that's at the heart of any budget: Do you need something or do you want it? As your child begins to understand this distinction, around kindergarten age, use family time to discuss and even list the things you all want versus what you need. Including parents in this exercise makes it especially powerful. This is a great opportunity to gain an understanding of your kid's values and preferences. And because it's at the heart of financial literacy (and, some would say, our current economic crisis), the discussion should continue on through her teens.

Explain the Great Divide: "Ordinarily, kids see parents do only one thing with money, and that's spend it," says Godfrey. "They don't see us budget, pay bills, save, give it to charity, or earn it." To start introducing those concepts, try this activity: Get a handful of nickels, dimes, and quarters, and attach a sticker to each coin that shows where that part of the dollar goes in your family budget. A quarter might be labeled "Taxes," another quarter "Housing"; a dime might be what you spend on vacations, and another dime might go to savings. When he begins to understand that this is where a bit of every dollar goes, he'll have a better understanding of how much money is left for impulse purchases like those overpriced Mylar balloons floating above the checkout line.

Cruise for Bargains: Once your child is old enough to comprehend addition and subtraction, occasionally turn a trip to the grocery store into a scavenger hunt. Give her a short list of items that could total around S25. Beside each item, list a reasonable nonsale price -- say, S3 for a gallon of milk. As you shop together, challenge her to find each item under the specified dollar amount. The extra incentive here: She gets to keep the money she saves -- but has to put back treats if she goes over. To add another layer to this activity, go ahead and buy two differently priced brands of the same item and do a blind taste test. Is one really better than the other? If so, is the difference in quality worth the cost?

National PTA president Chuck Saylors put this idea into action with his own family: "When my son Tyler went into the ocean with his iPod in his pocket, we told him he was responsible for replacing it. So he saved his allowance -- and decided to go generic. After he bought it, he said, 'Dad, this one works just as well!'"

Price the Urge to Splurge: The price of a bag of popcorn at the movies is many times what you'd pay if you popped at home, and the ice cream cone from that cute roadside stand is easily twice that of the home-scooped variety. You pay the higher amount, of course, because you want it right now. Try this exercise in delayed gratification: Next time your child begs for a cone while you're out, offer to pay him SI if he instead has a scoop at home, and explain that he'll be pocketing the savings. It's a true-consequences approach to teaching your child the cost of impulse buying. And if he still decides to go for the treat, take it in stride. He'll be doing what we all do occasionally -- indulging an impulse.

Develop an Interest in Interest: At about second grade, you can show your child how interest can accrue in her favor by adding three pennies to her piggy bank weekly for every dollar she has saved. And if she asks to borrow money, go ahead and lend it -- taking away seven cents each week for every dollar borrowed. No back-of-the-envelope lesson will ever be as vivid as watching that money stream out. (Make sure, of course, she has a way of paying you back; otherwise, the whole exercise will only lead to frustration.)

Follow the Money: Kids of all ages will find turning off the lights in the house a lot more rewarding when the money they save could be their own. Choose a regular monthly bill, such as electric, phone, or water, and read it together. Then discuss how the family might reduce it, and offer an incentive: If these efforts bear fruit, the money saved can go toward a special treat. Choosing just one bill and tracking savings for several months teaches your kids about bill paying and the rewards of saving. Another bonus: It just might inspire you to do a little competitive economizing, too.

Play the Game of Life: Yes, the actual game, which is geared to kids 8 and up. Although critics of this classic decry its "player with the most money wins" ethos, pulling out the board will inspire a natural conversation about taxes (the game regularly requires you to pay half your paycheck), interest, insurance, career choice, the stock market, and the financial impact of simple bad or good luck. Several years ago, Milton Bradley released a new version that uses credit cards instead of money and allows players to choose nontraditional work and life paths. Both versions will give you plenty to talk about.

Make A Mini-Budget: Many family money talks quickly devolve into power struggles, especially with older kids. Your child wants this or that name-brand item; you think it's a waste. You believe he doesn't understand the value of a dollar; he feels you don't understand his life. Kim Speek, a mother of two in Boulder, CO, found herself avoiding shopping with her 12-year-old daughter -- until she gave the tween a quarterly clothing budget. Arguments ceased as soon as her daughter was able to make the decisions and feel their impact herself. Most surprising to Speek: "Now that it's her money, she often happily chooses the less-expensive items." This tactic can work whenever specific items make shopping miserable, whether the budget is for snack food, music, or toys.

Make a Mega-Budget: Because a vacation makes clear all the invisible costs of life at home (food, housing, transportation, entertainment, etc.), it offers a particularly well-rounded experiment in budgeting. Silverthorne, CO, mom Carrie Brown-Wolf and her husband, Dan, included their three kids in the years-long process of planning -- and saving for -- a six-weektrip to Europe and Africa. "They were part of the decision to skip ayear of camp and our springbeach trip," says Brown-Wolf. Once on the road, the kids -- by then in their tweens and early teens -- decided to cut lodging costs by sharing a room throughout the trip. Where they could, they saved on food by eatingbig free hotel breakfasts and lighter lunches. Brown-Wolf was especially pleased when the kids applied sound logic to allocating their entertainment budget in England -- a choice that boiled down to amusement-park rides versus a play. "I heard them say that, in America, they could do the rides, but they couldn't see a play in the Royal Theatre."

Barbara Rowley attempts to teach (and practice) financial-literacy skills with her two daughters, 10 and 14, in their hometown of Big Sky, MT.

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