Is your kid money smart?

When they were very small, my kids could accompany me into a toy store, check out all the cool things, but we were able to leave without begging for something new. Then it seemed like almost overnight (at around age four), they began asking incessantly whether they could have a new My Little Pony or a new Little Critter book.

Once my kids started asking for stuff, I responded by telling them that no, they couldn't have everything they wanted because it all cost money and we only had so much to spend. That triggered these questions: What do you need money for? Where do you get money? And why can't you just get more?

Financial literacy is an essential skill that every child needs to learn eventually. But many parents wonder when is the right time to introduce these concepts to their children. And is there a way to teach them skills at an early age that might make them smarter with money later in life?

Five is a good age to start teaching children about money, says Judy Arnall, Canadian parenting expert and author of Discipline Without Distress.

"Giving them an allowance is a good start," she said. "Give them one dollar each week for every year of age. Don't give any money for odd jobs or chores, which I like to call duties. Allowances are for learning about exchange of goods and value of products. Chores are for learning about responsibility, discipline, duty and obligation, all virtues that should NOT be tied to money."

Sara Dimerman, therapist, parent educator and author of Am I a Normal Parent? agrees that at five or six years old, children can begin to learn about the value of money. You can teach them about a nickel vs. a dime vs. a quarter, and how one uses money to purchase goods or services. Then, as the child ages, you can add more complexity to the process.

"When you go to the grocery store, you can help your eight or nine-year-old see how one item costs more than another and how to evaluate which has more value. You can also get him to use a calculator to help add up your purchases before getting to the cashier so that he or she can see how closely matched his or her total to learn more about he cost of living."

Ms. Dimerman says that when it comes to teaching children about smart money management, modelling is key.

"Rather than lecturing or stressing your child out or making him or her feel that you are trying to be in control of his or her money all the time, model what you are trying to teach. As you divide your paycheque into segments, say out loud what you are doing. Don't pass money troubles or worries onto kids though – they shouldn't have to worry about where grocery or mortgage money is coming from, for example."

Joe Rich, social worker, author of Parenting: The Long Journey and frequent on-air guest on shows like CityLine and The Marilyn Denis Show, suggests that parents introduce financial literacy from the very beginning. At birth, Mr. Rich advocates parents buy three piggy banks from the dollar store and write "saving," "spending" and "charity" on them. When your children get birthday money from family members, you can trade it out for loonies your kids can put in their banks, explaining the concept behind each one. As the child grows, he or she will get an early understanding of saving money, spending money and giving to others who are in need.

"A lot of professionals will say, wait until they understand it, but I say they can have the experience and the understanding will come," he said. "They'll figure it out as they go along, and eventually they'll have to respond in a more adult fashion."

Another way to impart a good attitude about money is to teach them three important rules for living, says Mr. Rich.

"Go to school, have a job, do volunteer work," he said. "That's a full life. It's simple parenting in three words – school, work, volunteer. I see developing those ideas at a very early age – work could be walking the neighbour's dog or helping out in Uncle's store. Volunteering could be doing chores in the family home."

Mr. Rich's favourite exercise around kids involves giving each of them each five dollars, and letting them loose in the dollar store. Don't try to influence what they do with it, he says, just watch and learn.

"If one of them hasn't even walked around, grabs some things right away, goes to the counter and spends their five dollars in two minutes, that's who they are. If the next one walks around and can't make a decision, then that's who they are. And if the third one wants three more dollars and asks to get dad on the phone cause he owes him a dollar, that's who they are."

Once you've observed your children's behaviour in the store, you can better assess what you need to be teaching them about money, Mr. Rich says. "The first one who ran to the counter, they need to learn about patience, looking around, thinking and pausing. The second one that can't spend a dollar needs to learn about spending and looking after themselves. And the third one who's calling dad to front him a couple of bucks, it's never enough for them and they need to learn to live within their means."

"The question isn't, 'What do I teach children?' which is what people often ask, but 'How do I figure out what to teach my child?' said Mr. Rich. "And the answer is to listen to them and learn from them, then teach and talk."