As a working mom, you know how crucial it is to know how to make and handle money. So it may surprise you to learn that the majority of kids today are financially illiterate. In a national personal finance survey of 4,000 students, 68 percent failed—even though spending by and on U.S. teenagers is expected to exceed $208 billion in 2011. Teens entering college are offered an average of eight credit cards during the first week of school and most continue to carry three of them throughout their student years. Of current students, 45 percent are in credit card debt. They graduate from their undergraduate programs with an average of $28,000 of debt (loans and credit cards). And sadly, some university administrators report that they lose more students to credit card debt than to academic failure.

What can help? Financial education. Research shows that as little as 10 hours of instruction positively impacts students’ spending and saving habits. There are essentially six major areas of personal finance. Almost every financial skill your child needs will fit one of these topics:

• Setting goals
• Earning money
• Spending money wisely (budgeting)
• Understanding the time value of money (saving, investing)
• Using credit responsibly
• Protecting assets

You can teach your child about these areas progressively, beginning in the toddler years and building from there. Here, age by-age strategies.

Ages 2–4: What Toddlers and Preschoolers Understand

Little kids are like sponges when it comes to absorbing information. They’re beginning to develop habits and skills that will last a lifetime. So now’s time to lay the foundation for a sound financial future. Some basics:

Money is a medium of exchange. Preschoolers can learn that money has value, that they can begin exchanging it for things they want or need.

• Let your child play “store,” setting up things that can easily be counted like apples or oranges, and exchanging those items with you for coins.
• Take your child to a store or market and let him hand the clerk the money for a small purchase. (Use bills and coins—your child isn’t ready to deal with credit cards). Count the change and explain you’re checking to see if you received the right amount of money back. At this age your child may not yet be able to count change, but you’re demonstrating a respect for the value of money that he’ll remember.

Equivalency. As soon as your child can count to five, let her collect coins in a see-through jar (use a clear jar, not a piggy bank, as a young child needs to see it). Let her count the coins. When you sense she’s ready to learn more, explain that five pennies make a nickel, five nickels make a quarter and four quarters make a dollar. Let her give you coins for an even exchange. Very young children may have a hard time understanding the fine points of equivalency, so be patient and practice.

Saving gets us what we need and want. At early ages, attention spans are short, so saving should be for something immediate. “Let’s save for a box of crayons,” is a recipe for success. “Let’s save for a bicycle,” will feel like saving is a hopeless endeavor. To make the savings goal seem real, tape a picture of the crayons to the savings jar, and give your toddler a few coins each day to reach the goal. Once she makes her purchase, praise her for reaching her savings goal.

Ages 5-7: Starting to Make Choices

Why give an allowance? At about age 5, most kids are ready to begin receiving an allowance—one of the most important tools for learning money management. With guidance, managing an allowance can prepare your child for having an adult income. Many experts believe an allowance should only as a means of teaching money management—not as a source of reward and punishment, or as a means of control.

The importance of choice. Most children will make mistakes. Spending the entire allowance the first day is typical. Let your child do it. But don’t bail him out. Instead, discuss how he may want to treat next week’s allowance.

How much allowance? Some parents base allowance on age: $5 per week for a 5-year-old, $6 for a 6-year-old and so on. Another method might be to decide what you expect your child to pay for and then adjust the allowance to that. Look at the current costs of the things kids typically buy. As your child grows older, gradually adjust the amount he receives by reviewing and revising items to be covered by the allowance.

Allowance, needs and wants. Help your child to begin distinguishing between needs—things we must have to live—and wants—things we would like to have. Learning this money management skill can save him from impulse buying and compulsive spending later in life. As he grows, it will allow her to develop judgment about how to control her spending.

Should a child earn an allowance? Parents think differently on this subject. Many reach a compromise, giving the child a base allowance whether he has earned it or not, continuing to expect the child to do basic household jobs as part of the family and paying extra money for larger chores. There are several advantages to this method. You avoid family clashes, in which the child says, “No, I’m not going to make my bed for that price,” or, “I don’t care about 9allowance. I don’t want to pick up my toys.” At the same time, the child learns that he can earn extra money and even negotiate the price for tasks like weeding the garden or dusting the furniture. Be realistic about how much the child can accomplish and how well he can do it. Match the job to the child’s ability and then give adequate compensation when the job is completed.

Saving:

Goal setting. Talk to your child about saving for something he truly wants and can save for in about a month. Show him how much he needs to save each week to meet his goal. Continue to attach a picture of the item to the savings jar to make the goal seem less abstract.

Interest. Start teaching your child about interest. For every dollar he saves, you can add a dime at the end of the month. (This, of course, is more interest than a savings account pays, but at this point you are simply getting across the idea that saving money can earn money.) Keep the dimes in a separate jar so the growth is visible.

Spending:

Learning to shop. If your child has and saves money, he’s ready to learn how to get the most value for that money. When you buy clothing, explain the importance of waiting for sales and selecting quality merchandise. Suggest that he do the same with toys. Ask him to compare the price and the quality of two toys, rather than just forking over his allowance.

Where money comes from. Remember the adage “Money doesn’t grow on trees?” Today, some children may be as unaware as we were about sources of money. For instance, some may believe that $20 bills just come out of machines, or that plastic cards are all you need to buy things. To give your child a more realistic picture:

• Before you go to the ATM, take him with you to the bank to make a deposit. Explain at the ATM that you’re simply using the money you’ve already put in the bank.
• When you pay with a credit card, explain that giving the clerk the card is permission to charge your credit card account the amount of the purchase. Be sure your child understands that you will have to pay the credit card bill at the end of the month.
• When you are paying bills, show him the credit card statement, saying something like, “Remember the T- shirt we bought for $10? Here it is on the list of things I have to pay for now.”

Ages 8–10: Strengthening the Financial Foundation

The family budget. Kids quickly learn that Mom and Dad spend a good deal of time working and paying bills. When your child shows an interest, tell her about the big spending categories—food, shelter, clothing and transportation and how much the family spends on each of these categories. To provide hands-on experience, let your child help you write checks for a month; or if you bank online, let her fill in the blanks and click to send the money.

Needs and wants, continued. Stress that central budget items are needs. To help make the distinction, consider having your child inventory the family room, listing each item as either a want or a need. She’ll soon see that the Nintendo is a want, and the telephone a need.

Learning to wait. You may also want to talk about delayed gratification—not in those words, of course. Point out that if you don’t actually need something, you can wait to purchase it until you have cash in hand. To the inevitable question of “why?” offer a simple answer: “We don’t want to owe too much money. We have to earn the money before we can spend it.” Anticipating a purchase and finally being able to afford it can instill a great sense of pride.

More about choices. This may be a good time to introduce the idea of trade-offs. Tell your child that even very rich people can’t have everything. This is a tough concept and may lead to a discussion about value. Point out that you have to know what you value most before making a choice. For example, if your child begs for an expensive software game, you might ask if she’s willing to trade off Saturday movies for a while.

Starting a savings account. Now is the right time to set up a savings account for your child. Some banks and credit unions have child-friendly accounts that don’t require a minimum balance and charge low or no fees. Explain to your child that once she saves a certain amount, she can open a money market account or a certificate of deposit (CD) with a higher interest rate—what the bank pays in exchange for holding and safely using the money you’ve deposited. This can become a savings goal. Few financial institutions offer passbooks anymore, so you will probably need to find other ways to make the growth of savings visible. One way is to have your child write down all deposits in a notebook. Also, go over the savings statement with her to see how much interest her account has earned. Keep the savings statements in a three-ring binder, by date, for easy reference.

Should your child have to save? Ironclad rules seldom motivate, but you may want to strongly suggest that at least 10 percent go into savings. Financial planners recommend the “70-20-10 Rule”—70 percent of income should be earmarked for spending on immediate needs, 20 percent should be set aside for the purchase of big-ticket items, and 10 percent should be saved or invested for long-term goals. The point is to establish the savings habit.

Help your child establish savings with short-term, intermediate, and long-term goals. Show your child that some savings goals are short-term (money for snacks at the movie), others are mid-term (a baseball glove), and still others are long-term (such as saving enough to open a higher-paying savings account, or buy a computer). It helps to break total amounts needed to meet each goal into the amounts your child will need to save each “pay day” to meet the goal. For example, let’s say she decides she wants a pair of ice skates. They cost about $40. How much must she save each week to buy them? If she can save $4 per week—or $8 every two weeks—it’ll take 10 weeks. To keep children interested, some parents set up matching programs. For every dollar the child saves, the parent puts in a dollar— much like some employer savings and retirement plans. This can be especially helpful in keeping a child focused on long-term savings goals.

Encourage entrepreneurial effort and earning extra money. One great source of extra money is a garage sale. Kids can sell their old toys, books and clothing. They can polish, wash and mend things so that the sale items will be more attractive to prospective buyers. You may have to help set realistic prices. The depreciation in what was originally paid for the item and what it can be sold for can be instructive.

Ages 11–13: Dealing with Peer Pressure and Learning to Plan

Keeping up with “everyone else.” During the middle-school years, and even before, “what’s hot, and what’s not” is an enormous enticement for spending. You really can’t control peer pressure. But by the time your child is around 11, he should know about ways to make money (allowance, extra jobs) and how to spend it wisely (savings, planned expenses.) If you’ve been paying him interest on savings, she has a rudimentary grasp of the time value of money. With this background, you may notice him beginning to have the independence and self-confidence to make his own judgments. Continue to allow him to make decisions on his own, even if it means he sometimes spends money on the latest fad.

A good time to introduce the “magic of compound-interest.” Make a game of this by looking at a compounding interest rate chart with your child. To illustrate the power of compounding, show your child how a dollar grows over various periods of time at various interest rates. Then show what happens if you increase the amount to $100. Kids get excited when they see how well they can do.

Pacing spending. Review your child’s allowance with him to see that his “income” covers what you expect him to pay, adding items when necessary. Lengthen the time between giving out the allowance—say to once every two weeks—so that he can learn to pace himself. If your child runs out of money before the end of that time, you might lend him some, but insist he pay it back from his next allowance. Keep careful records and be consistent about his allowance day. Otherwise, he’ll get used to you bailing him out, and the opportunity for him to learn more about money management will be lost. If he continually runs out of money, don’t rescue him. This is a good time to introduce your child to the concept of a spending plan, or a budget.

Budget talk. Talk to your child about budgets and ways to live within one. Show how the family budget works. Keeping track of expenses and living within a spending plan is hard for most people, so don’t expect immediate comprehension from your tween. What you’re working on now is laying a foundation for understanding. Look for teachable moments. Be observant and notice what your child truly wants. When the time is right, talk about how he can achieve what he desires. It would be helpful to have him determine how much he needs to save each week in order to reach his goal in a given amount of time. As he learns to plan and prioritize, he’s learning the skills needed for a more formal approach to budgeting.

Introduce and explore market concepts. It’s easy to get basic investment information. There are many quality websites and books on investing, some written specifically for young people. Talk to your kids to see what they already know. Also, go over basic investment principles such as setting investment goals and diversifying investments to reduce risk. Buy your child a small amount of stock in a company he recognizes and help him track it—or do this using fictitious “money,” just for the fun of it.

Ages 14–18: Getting Ready for the Adult World

Basic tips:

• If your teen has already learned about goal setting, saving, credit and basic budgeting, good. If not, start now to communicate these skills as discussed here in younger-age sections.
• Encourage her to take any personal finance instruction offered in school.
• Have fun together by searching and visiting quality personal finance websites.
• Keep the dialogue about money open. And let it be a discussion rather than a lecture.

Earning a paycheck. Especially in the early teen years, your child needs guidance about employment. You may want to discuss values, with school being the top priority. Some parents set a limit on work outside the home—as does the law. If your teen does take a job, go over codes of conduct and dress at work, the importance of being on time and other employer expectations. Your teenager can learn a lot from having a job. One of the most important things is the concept of “pay yourself first.”

If she begins to set something aside from every paycheck, her savings will grow. More important, she’ll establish a lifelong habit that can result in financial security in the long run. In addition, by looking at her pay stub, she can see how taxes affect take-home pay and how many hours of work it takes to buy a pizza or an iTunes card. Work with your teen to figure out how the items she buys equate to hours spent earning money for them. Understanding this relationship may counter the temptation to spend every cent she earns “because there’s more where it came from.”

Managing a checking account. Shop around for an account with the smallest balance requirements and the lowest service charges. Talk about fees for bounced checks and how to report a lost checkbook. Many accounts offer ATM debit cards that can be used for purchases instead of writing checks. Make sure your child understands that using the card takes money directly out of her account and that she must write down the amount of purchase in her check register, just as she would record a check. Work with her to balance the checkbook for the first few months.

Learning how to use “plastic.” High school students can learn a lot about how to manage a credit card by first using a debit card. Because money comes out of a bank account, this type of card reinforces the need to pace and limit spending. A debit card can be attached to either a checking account or a special savings. Attaching a debit card to a savings account is economical because no checking account fees are incurred. And using a debit card has the added benefit of helping teens establish a working relationship with a financial institution. When your teen does graduate to using a credit card, look for one that lets you establish a ceiling—$500, for example. Communicate that:

1)    Credit card purchases are loans. The price for the loan is called “interest.” It can be very high, especially if the borrower pays only the minimum each month.

2)    There’s one way to avoid paying interest, and that is to pay off the balance each month. Always do this, except in true emergencies.

3)    It’s important to shop for the best deal. Compare interest rates, annual fees, late fees and grace periods.

4)    One credit card is plenty.

Investing. Did you know that a 15-year-old with earned income who invests $2,000 a year in a Roth IRA for just five years (until she reaches age 19) will have almost one-million dollars tax-free at age 65, if the account earns a little over 10 percent? This is the magic of compounding! And it should impress most teenagers. Some mutual fund companies will allow your teen to start a Roth IRA account with the initial $2,000 deposit and low monthly deposit amounts thereafter. In addition to the Roth IRA, you can also open a custodial or guardian account for your teenager’s investments. Keep in mind, however, that if your teen is college-bound, the financial aid office will expect a large percentage of your child’s custodial account to cover college expenses. (It’s often better to save for college in the parent’s name.)

More about the market. Some teens are truly sophisticated about stocks, bonds and mutual funds. Others are not but may be interested in learning. Talk about the best way to start investing, the risks and rewards, terminology, different types of investments and the value of long-term investing. All of the basics are covered in detail on a number of quality websites, which you and your teen can explore together. Discuss how to monitor investments and the advantages of dollar-cost-averaging. (Or how about asking your teenager to teach you these concepts?) Know that neither you nor your kid needs to be a stock market genius to do well financially.

Learning about insurance. Teenagers need to understand that insurance is a way of managing risk. Discuss how much your teen thinks a major illness or car accident might cost. Once she has the idea, you can say that your family has insurance to protect against financial loss resulting from occurrences beyond your control. Teens should know the basic facts about:

• Health and disability insurances. Check to see how long your family policies will cover your child and share the information with her. Colleges, universities and private employers often provide this coverage, but young adults looking for a job may need to take out a temporary interim health policy and a disability policy. Young adults who are self-employed or who work for an employer that does not offer such coverage will have to search hard to find affordable quality policies.
• Car insurance. Many parents ask their child to cover the increase in car insurance that comes when a teenager starts to drive. Your teen should know how to shop for car insurance, getting quotes from several companies before choosing a policy. If your teen owns an older used car, you may want to suggest she take out just liability and uninsured motorist insurance, foregoing collision and comprehensive coverage.
• Renter’s insurance. If your teenager is leaving home or plans to live off campus, she should consider protecting her property with renter’s insurance. If she has items such as a computer, stereo equipment, etc., the cost makes sense. Paying for renter’s insurance can be good preparation for understanding homeowner’s insurance in years to come.

Remember that children often mirror their parents’ money habits. As you help your kids learn core financial concepts, make sure you follow your own advice. From your good example, they’ll begin to see how to apply these basic ideas in the real world.

Paul Golden is the communications manager for the National Endowment for Financial Education (NEFE), a nonprofit foundation dedicated to improving the financial well being of all Americans.