Making sense of dollars and cents

"A penny saved is a penny earned," said Benjamin Franklin more than 200 years ago. Franklin's wisdom holds true just as much today as it did then. Though it can be a difficult concept for adults to abide by, it is one we can begin instilling in our children at an early age. Teaching the concepts of earning, spending, saving, borrowing and sharing sets the stage for a lifelong appreciation of money.

Ages 4 and younger

Even young children can learn basic financial concepts, beginning with learning to identify the types and values of currency. Preschool children can count coins and learn that five pennies equal one nickel. You can play a game by setting up a make-believe store and exchanging coins for items in your store. Give them a piggy bank where they can save their own coins. Teach children that family members work to pay for food, shelter and clothing.

Children in grade school

Once children are in grade school, establishing an allowance is a good first step in teaching your children how to manage money. Giving them money of their own empowers them to make decisions about how they spend and save. Help them decide on something they would like to buy. Is it something small they can buy with one week's allowance like stickers, or maybe it is something they need to save a few weeks worth of allowances in order to purchase - like a new board game. Allow your children to make mistakes in their spending decisions and discuss the consequences without blame.

Use the opportunity as a learning experience to guide a better choice next time. "I give my children a weekly allowance according to age," said Gloria Tarrer, director of Children's Service Society of Wisconsin's Family Resource Center of Sherman Park in Milwaukee. "For example, my 6-year-old gets an allowance of $6 each week. We ask her to save $2, so she has $4 to spend on what she wants." Tarrer guides her daughter's spending decisions and helps her learn to count change at the store.

As children mature and begin to develop solid math skills, they can begin to grasp some basic economic principles like understanding the difference between needs and wants. Needs are something you must have for survival. Wants are something they would like to have, like CDs and toys. They also can make decisions regarding opportunity costs. Opportunity cost is what you give up in order to do something else.

"If there is a field trip going on later in the week, it's a learning opportunity for me to say, 'Don't spend your money on Sunday, you might want to save some for your field trip on Wednesday,'" said Tarrer. "Sometimes my children want something that costs more than they have individually, and I'll watch them pool their money to buy something they can all share." By having their own money, children also can learn the importance of giving by buying gifts for relatives and friends, or donating money to a charity. Talk to your children about philanthropy, and have them consider giving some of their money to a cause they express an interest in.

Older children

As children mature, have them take more responsibility for their financial decisions. Teach them to budget and research their own expenses in newspapers, catalogs or online. "My 10-year-old wanted to buy a chemistry set. I gave him a spreadsheet to budget how much he would need to save, which was about three weeks worth of allowance. Once he'd saved enough, he was able to buy it and we took a special trip to the store. It was an enlightening experience for him because he had the power to choose, and after that one time, he began to do it a lot more," said Tarrer.

Once children are teenagers, you might want to consider a part-time job. Having a job helps teens understand what is involved in earning money. Discuss how their earnings should be distributed between savings and expenditures, and help them open and balance a checking account. It also is important to teach them the distinction between cash and credit.

For children at every age, it is important for parents to demonstrate responsible financial behavior themselves. Express your desire to have things you can't afford. Children need to know that parents say "no" to themselves, too.