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Money Skills for Your Kids: Ages 4 to 9

Stephen Levine, of Washington, is 4 years old and hasn't learned how to count. But he knows all about setting long-term financial goals. He and his parents put change into a milk carton, and when the coins reach the black marker line, Stephen knows he's going to buy something — and it's going to be good.

"It's very elementary, but it's not the end of his financial education. It's the beginning," says his mom, Laura Levine of the JumpStart Coalition for Financial Literacy, about her effort to teach her preschooler personal finance.

Parents and educators agree that kids start learning about money at an early age. So if you want your children to grow up financially savvy, start teaching them simple money lessons around age 4, and then gradually add to their knowledge as they get older.

(If your kids are older, click to these other stories about raising kids 10 to 14 and 15 and older).

Start Simple: What’s Money?

Kids are little sponges, picking up on the idea that parents pay for things the tykes want from the time they’re old enough to see colors. But if you give a preschooler the choice of getting a nickel or a dime, she’s likely to choose the nickel, thinking the size makes it worth more, says Janet Bodnar, editor of Kiplinger’s magazine and author of Raising Money Smart Kids.

So for children who are 4 years old, the first order of business is teaching the difference between nickels, dimes, pennies, quarters, and dollars.

Bodnar says the best way to do this is to let the kids use, touch, and play with coins. Provide change to buy a piece of bubblegum in a vending machine. “Five cents?” you might say. “That would be a nickel.”

Stack up coins to compare how many pennies make a dime and how many quarters make a dollar. Or let the kids buy 10 cookies for a dollar. The more hands-on the activity, the better.

The added bonus is that by teaching younger kids about money, you’re also showing them how to count and starting them on the road to grasping addition and subtraction.

Allowances: All About Choices

Kids even as young as 5 years old can learn about budgeting if you give them an allowance and let them spend it, says Karyn Hodgens, co-founder of Kidnexions, which makes money-management software for kids ages 6 and up. Certainly they’ll need guidance, but not so much that they’ll lose the ability to make their own choices.

“Kids love to feel like a grown-up,” Hodgens says. “Giving them an allowance and the ability to make decisions about how to spend it teaches them that you only have so much. When it’s gone, it’s gone.”

Most experts agree that you should start giving your child a small allowance as soon as she starts school, but there’s plenty of dickering over the right amount. Bodnar suggests an amount equal to half the child’s age — that’s $3 a week for a 6-year-old, for example. Some parents think that’s too stingy. Others think it’s too much.

Hodgens suggests you choose an amount based on what you already spend on small discretionary items your child likes but doesn’t need — such as after-school snacks or ice cream. Just make it clear that the amount you’re giving replaces what you would have been spending on him or her. Then your child can decide whether the item is worth it.

This solution worked beautifully for Carrie Schwab-Pomerantz, president of the Charles Schwab Foundation and an advisor to the President’s Advisory Council on Financial Literacy. “My son, when he was 7 or 8, wanted Pokemon cards. He was begging me to buy them,” she recalls. “I finally said, ‘You have your own allowance. If you want it, buy it with your own money.’ He thought about that for what seemed like a really long time. Finally he said, ‘I think I’ll pass.’”

Budgeting is all about making choices. That’s a lesson kids learn fast when they’re spending their own money — and may never understand when they’re spending yours.

John Maver, of Andover, Mass., set the initial allowance for his three kids at $3 a week for one simple reason: He uses three-jar budgeting. This system lets his kids, 4, 6, and 9, put one dollar in each of three jars with the labels “spend,” “save,” and “share.” His approach is used widely and even supported by dozens of allowance systems and piggy banks sold in stores and over the Internet. It drives home the concepts that money can fund short-term, long-term, and charitable goals and that you need to feed all those goals to get the things you want. When Maver’s kids want something, he asks if they have enough for it in their “spend” jar. They take their “share” dollar to Sunday school to give to someone who might benefit from it. The money in the “save” jar grows until there’s $50, at which point, dad introduces the kids to the bank. Then, he and the kids fill out the paperwork to open an account and the children begin learning about long-term saving for big goals.

Long-term Savings: The Power of Compounding

While saving comes naturally for some kids, others have a tough time resisting the lure of immediate gratification. (Just like adults.) Hodgens faced this disparity with her boys. Nathan was a natural saver; Ryan, a natural spender. At age 7, Ryan couldn’t fathom why he’d want to sock money away for tomorrow when he could spend it today.

Hodgens and her husband decided to do a little math to drive home the benefit of compound interest. They graphed out exactly how much Ryan would have if he saved his $3.50 weekly allowance (equal to half his age) and earned 10 percent per month in interest. To be sure, that’s an unrealistic return (round numbers are easiest for young children to understand), but the point hit home. “If you have ever seen a light bulb go on in a child’s brain, it was that moment,” says Hodgens. Ryan has been saving ever since.

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