A recent survey by the American Institute of CPAs found that while the majority of parents provide an allowance, they are uncomfortable talking to their kids about finances. Mom and Dad are more likely to talk about the importance of courtesy, healthy eating habits, and good grades than they are about managing money. Savvy parents are taking steps to help their kids learn how to manage their money.

When should you start?

Kids can begin grasping concepts such as needs and wants, as well as the idea that most people can’t buy everything they want, as young as three or four years.  It’s important to start explaining to these tots about the relationship between work and money.

A trip to the grocery store can be a great learning experience. Show your kids how different products cost different amounts, and explain when you feel it’s worth spending more and when a lower-cost version will suffice.

Grade School

Grade school is often when parents start giving allowances as a way to help their children live within a budget. Before handing over the cash, talk with your child about the purchases you expect the allowance to cover, such as video games. Otherwise, you may get ongoing requests to handle these expenses.

Introduce “values” to the discussion. Younger children are quite capable of grasping the concept of using their money to help those who don’t have as much, and to save for longer-term goals.

It is also important to think through the relationship between your child’s allowance and the chores he or she is expected to handle. Some parents view an allowance as strictly a money management tool, and that, as members of the family, the kids should have chores that they’re expected to handle without compensation. Consider that a child could receive extra payment for handling certain chores that go above and beyond day-to-day tasks.

Tweens

As your children gain experience handling small amounts of money, ask for their input on their larger financial decisions. Before heading out to buy new school clothes, you might discuss what items your child needs the most, and whether it makes sense to buy several, less expensive items, or one pricier item.

Consider how tuned-in many tweens are, and discuss how advertisements are
designed to prompt consumer desire for a specific brand or product. You might point out that a popular brand of shoes costs significantly more than a store brand, and ask your child if the difference in cost is worth it.

Tween years are also a perfect time to open a bank account in your child’s name. Use this opportunity to explain how to record deposits and withdrawals, and provide a simple calculation to demonstrate the compounding effect of interest.

Teenagers

Teens can be expected to take on greater responsibility for their own expenses, including clothes, entertainment, cell phone use and transportation costs, to name a few.

When practical, bring your teenager into the discussion when you’re researching major purchases, such as a new appliance. They can read product reviews and descriptions, and compare prices of different models. Of course, make it clear at the outset that you will have the final decision.

If you believe your child is ready to handle a credit card, a safe way to start is with a pre-paid credit card. This card is secured by cash deposited in the account. Once a teen has proven capable in handling the card, consider allowing him or her to open a regular credit card. Make sure you review the rules of responsible credit card use and the speed with which interest expense can add up.

Is it time for a chat with your kids?

Instilling sound money management skills in your children requires discipline, common sense and consistency. Kids who can intelligently manage their finances are typically more confident in many areas of their lives, and are less likely to expect help from their parents. And that’s a good thing.