When was the last time your child asked you for something you didn’t want to buy or simply couldn’t afford? (Let’s guess, five to ten minutes ago?) Do your children love keeping up with the kids’ spending next door? Fast forward ten or fifteen years to early adulthood and your daughter or son could be on the fast track to experiencing serious financial woes.

According to the 2004 Visa USA back-to-school survey, 78 percent of parents said their high-school-aged kids do not have budgets, and 57 percent of parents put no restrictions on how their children can spend money they are given.

A survey conducted by FleetBoston in September 2003 found that only 26 percent of parents felt well prepared to teach their children about basic personal finances. Fewer than half the respondents felt they were good role models for their children regarding saving and spending. Could it be that these parents themselves were not taught the basic principles of financial literacy?

Here is the good news. Starting today, you can learn while teaching your children the road to wealth in four easy steps.

1. Instill Positive Money Habits Early

At what age can you start teaching your children about money? As soon as they start to understand that money gets them the things they want. Teaching a three-year-old child about money may seem like an unconventional idea, but over 40 percent of families live off 110 percent of their incomes. If we don’t want to pass this legacy on to future generations, we need to teach our children a better way to relate to their money.

Starting with a dollar, have your child follow the 10/10/10/70 concept: 10 percent for charity, 10 percent for investing, 10 percent for savings and 70 percent for spending wisely. This will instantly teach you how to give back, pay yourself first and live within your means.

Your adult habits form in childhood. If a child starts the habit of taking a dollar and spending a dollar, at five, ten and twenty years old, that child has created the habit of living paycheck to paycheck. But, if children create the habit of dividing their money before they spend, they will create the habits of successful money management and be able to secure their financial future.

2. Instill a Work Ethic, Starting with Allowance

Any parent has experienced how children will spend our money three times faster than they will their own money. Do you want to put a stop to that? Sit down and figure out the amount you spend on nonessentials for the month on your kids—and then have them earn it.

Giving children money for nothing creates an entitlement attitude. When they earn their allowance, however, they will appreciate it and put a value on it. If you spend fifty dollars a month on nonessentials, that’s $11.55 a week or $1.65 per day your child can earn.

Children will never manage their parent’s money as well as their own. They can easily learn that if they want more money, regardless of the reason, all they have to do is come up with a way to earn it. Money is earned through providing a service, income from a job or interest from investments, businesses and commissions. Few adults earn money for nothing and the sooner our children learn this, the sooner they will start building a strong financial future.

3. Children Have the Gift of Time and Compound Interest

Just imagine how much money you would have accumulated if you started investing and saving at a young age! How much of an advantage would you have in adulthood if sound financial habits were as natural as walking and talking?

Kids are motivated by money. If you start teaching kids the power of investing and saving their money, they will listen intently. Go online and show your children investment calculators. Show them what the fifty-dollar video game would be worth in fifty years if they invested the money instead of spending it.

The key is to show kids the power of invested money. Once kids see how money works, they will think twice before spending their money. Play games like Monopoly and the Game of Life, talk about stocks, bonds and mutual funds. Teach your child the vocabulary of money early. Don’t ever say that children are too young to think about money management; the sooner your child thinks about financial freedom the faster she will get there.

4. It’s Okay to Make Mistakes with Money

Let your child make mistakes with money early. When your child wants an item you feel is “not worth the money,” bite your lip and let him purchase it. The best way for children to learn the value of money is to buy something with their hard-earned cash, and then see it break, discover the marketing message was false or that it was not worth the price.

These lessons will help them make wiser choices with what they spend their money on later down the road. Let them practice and make mistakes with $20, $30 or $50 items now rather than with big-ticket items later. Mistakes are opportunities for learning; help your child understand that how we use money now will determine how wealthy we are in our future.

If you instill the habit of dividing your money before you spend it, introduce a work ethic through allowance and allow them to make mistakes early with money, you will give your children the necessary tools for creating wealth. Children can take dollars and make millions because they have the powerful gift of time and compound interest, thus allowing their future days to be paid for in advance.

LORI MACKEY is an award-winning author, speaker
and coach who creates fun financial education products;
she is founder of Prosperity4Kids, Inc. and is recognized
as a leading expert on kids and money.