Helping young children to understand the value of a dollar can be tricky. Your four-year-old may think that bigger coins are more valuable, or that a one dollar bill is the same as a one hundred dollar bill. They look pretty much the same, right? And because money is such an ambiguous concept—why do we exchange these flimsy pieces of paper for toys or food?—many parents don't even begin teaching their children about managing money until well after the kids have started elementary school. But if you introduce this fundamental subject early enough, money lessons can become part of your children's daily lives, making them more likely to grow into financially responsible adults.
"It's important to remember to teach financial concepts that are age-appropriate for children," says Francine L. Huff, author of The 25-Day Financial Makeover. "What you teach a five-year old isn't going to be the same as what you teach a 12-year-old."
Introduce the concept of budgeting
"Start out teaching small children that just because they see a toy they want at the store doesn't mean you will buy it for them if it doesn't fit into your family budget," Huff suggests. "You can explain that following a budget simply means that your family only has a set amount of money to spend each month and that it's your job as a parent to decide how much should go toward food, clothing, paying for a home, toys for your child, etc. When you actually tell a child that you only have $10 to spend on a toy he will begin to understand that there are limits to spending and hopefully will refrain from constantly asking for things they know you can't afford."
Allow an allowance
It's also important to give children who may still be a little young for a regular allowance an opportunity to get money and spend it with your guidance. Tracy Benson, a mother of three in Custer, SD says that when her two older children were preschoolers, she gave them money for helping around the house. "Then, after they amassed a few dollars, we took them to the 99 cent store and let them spend half of their money on whatever they wanted. My husband and I bought each of them a small plastic piggy bank, and the other half of their money went in there."
Benson has a suggestion for families in which some kids get an allowance but others are too young. "What we do for my two-year-old now, since the older two get an allowance and she doesn't, is have my husband save the coins he collects during the course of a day (change from a vending machine, for instance), and give them to her," Benson says. "She loves to 'feed her piggy.' Then, when the piggy gets full, we take him to the bank and put the money in her bank account. It definitely adds up quickly."
David McCurrach, publisher of Kidsmoney.org, writes on that website that "The only way kids will learn to manage their money is through their own experience and the guidance you, as parents, may give them. In other words, kids learn from trial and error and role models just like the rest of us. And if they can't learn as children, the price of adult mistakes can be great in terms of money and relationships."
A child as young as three or four years old can receive an allowance, McCurrach says. To figure out the appropriate amount, he suggests, you can determine how much money you already "give" them in the form of superfluous purchases and make a list of what they are expected to pay for with their allowances.