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Monday, February 16, 2009

Teaching the Value of a Dollar to Your Child

By Laura Nelson-Smith

As kids watch the adults in their lives use money, they catch on to its importance money has in life. The best way to instruct your child about the significance of a dollar is by showing them the many ways the dollar is used.

Begin When They're Young

Begin explaining to your child how money works from a young age. It's important for kids to know you get money by earning it. Items (or services) in life are given in return for money, and the value or worth of that item varies according to the seller. If you do not have enough money, you can not purchase the item.

A follow-up to this is talking about saving money. A child with a couple dollars could go buy a piece of candy (that'll be gone in 10 seconds) or an inexpensive toy (that will be broken in 10 minutes or completely forgot about the next day). However, if that child decides to save those dollars, a better item can be purchased that may have more meaning and last longer.

Have A Savings Plan

One way to teach children about savings is setting a percentage they should save every time they earn money. Ten percent is an easy sum to learn; simply move the decimal point one space to the left. For every $1.00 earned, $0.10 will be saved ($23.48 earned, $2.34 saved).

This savings isn't for a better short-term item, but for a "rainy day" or even a car or college fund. The remaining $0.90 can be used for the candy or "better item" as mentioned above. This principle can teach the child self discipline for very long-term savings (i.e. a house or retirement when they're an adult).

It is a given that a six-year-old will not get the "rainy day" theory, and talking to them about the privilege of driving may not win brownie points; but after saving 10% over the years, they can see how it adds up. This is a valuable teaching for when they get their first job. They will be used to saving that 10% already

You might also set aside a certain percentage for charitable giving, so kids can also learn about this important aspect of managing money.

As Your Child Grows

Once your child is old enough, take them down to the bank to open a savings account in both of your names. Take them to the bank once or twice a month to put so that they can deposit their savings. When the bank statement comes sit them down and show them how money is grows with the help of interest.

It is a good idea for them to know that interest is a big part of saving and spending. With interest you either pay more or earn more; it all depends on what the interest is for. It is a good idea to show teenagers that if a debt is not paid for in 30 days, they will end up paying more for an item than the purchase price.

A good way to prove how unfavorable or great interest can be is by role-playing. Find an item your teenager wants to use a credit card to pay for. Create a chart showing how making only the paying the minimum changes what the total debt is, how long it will take to pay the debt off with minimum payments, and how much interest (or money lost), is paid in total.

You can even switch it by taking the number of months it will take to pay off the debt verses the interest they would earn with a savings account if they save money for the item they want. The amount of interest may not be much, but you want them to see that if you save money to purchase the item, you pay only that amount and there will be no interest to pay along with it.

The purpose of teaching your child about money is to get them to see the value in proper money management.

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