Family Finance: Mastering Money Management

Denise Trowbridge

I won't lie. Sometimes, I get a tear in my eye when my youngest son, now 7, walks out of the toy aisle empty-handed. He has to buy toys with his own money, and when he opts to save up for something? Well, it warms my heart.

I give him an allowance because I want him to learn basic money-handling skills such as paying and getting change, as well as how to save up for the things he really wants. I also hope he'll absorb what every economist knows: Every decision has a cost. If you spend money on one thing, you have less to spend on something else.

Like most parents, I want my children to be better and smarter at managing their resources than I am, because it's a scary world out there financially. It's way too easy to slide into an abyss of debt that can take years to claw out of.

That's why actively teaching children how to manage money is essential. Most parents already have kids counting coins, mastering addition and subtraction and, hopefully, putting some of their birthday money into a savings account. But that's not enough. Children need to learn about money in a nitty-gritty, tangible way to get the lessons to stick. And you're their primary teacher.

“Research shows that parents are the number one influence on our children's financial behavior,” author Beth Kobliner wrote in her book “Make Your Kid a Money Genius (Even If You're Not).”

“The country's increasingly ‘you're on your own' approach to managing our personal finances—everything from health care coverage to planning for retirement— makes giving your kid money skill now more important than ever,” she wrote.

Luckily, it's easy to introduce essential money management skills. Heading to the store? Tell your children before you go what you are there to buy. As in, “We're here to buy a package of tube socks and nothing else.” This should eliminate some of the gimmies (over time, as long as you don't give in) and reinforce the difference between wants and needs.

Then, pay in cash. I try to use cash whenever I shop with the kids because it makes the actual cost of things more real to them. My kids think “plastic money” is some sort of magical never-ending fountain because they don't see me pay the bill. Not so with cash. We feel the “pain of loss,” making us less likely to overspend, according to a landmark MIT study on credit card purchasing behaviors.

The weekly grocery trip is a goldmine of adulting lessons. If your child is old enough, let him or her add up the total for the groceries—in their head—as you shop. Make it simple by letting them round prices up or down. (Two lessons in one!) As long as they know to count that 99-cent box of pasta as $1, they can take it from there. Reward them if they come within $1 or $2 of the actual bill.

Another lesson: Let them help make the grocery list and browse the store fliers while you talk about meals you can make with what's on sale. With my boys, the discussion goes something like this: We need to buy enough food to last a week, and we have this amount to spend. These are the things on the list that we need, but how we fill the rest of the menu is negotiable, as long as we stick to the budget. If I'm feeling really ambitious, the boys help me clip coupons. (Once kids understand coupons are like free money, they're all in.) I reward them with a special sweet treat from the store.

The goal is to teach a mode of thinking that can be applied to the larger financial picture. Most of life is about making the most of the resources you have. If you want to buy the rib-eyes, you might have to skip a trip to the movies.

Next time you go out to eat, have your child estimate the bill. Reward them if they come close. When it's time to pay, hand them the cash and let them do the rest. Teach them to wait for change and a receipt. Make sure they count the change and do the math to double-check that it's correct. Teach them to check the receipt for errors.

These may seem like trivial tasks, but they're skills adults use every day without a second thought. They're also things your kids aren't going to learn if they don't learn them from you.

Denise Trowbridge is a self-professed money geek who writes about personal finance, banking and insurance. Follow her on Twitter at @DeniseTrowbridg.