smart spending

Kids spend, save, learn with an allowance

In fourth grade, up the ante. "Teach compound interest. Show them what happens if they save their money over time," says Bill Dwight, founder of FamZoo.com, a virtual allowance tracker. Reinforce the lesson by contributing 10 percent each month to their savings, so they can see compounding work.

Remember: Financial literacy means learning to spend, too. Letting children spend on what they choose, within reason, motivates them, Hodgens says. When they make mistakes or regret a purchase, don't bail them out.

"Instead, talk to them about what they can do better in the future," she says.

The tween years

Middle schoolers have more complex financial needs than younger children. That's why this age group is ready for bigger lessons in spending, earning and saving.

It's the time to teach entrepreneurship and encourage children to turn their talents into income, whether it's baby-sitting or starting their own business. "Thanks to the Internet, there are opportunities for all kinds of microbusinesses that kids could do," Dwight says.

Ray Martin, a financial planner and contributor to CBS MoneyWatch, says if you haven't already, it's time to open a bank account for your kid. Mature tweens may be ready for an ATM card with a no-debit feature. "They can then learn real-life money management, like checking balances online," he says.

Tweens also are ready to learn basic investing -- how the stock market works and how to buy shares, Hodgens says. They can even invest some of their own savings or look over your shoulder when you're managing your portfolio.

Parents can add special budgets to tweens' financial universe, such as back-to-school clothing allowances. Discussing what they have, what they need and how much to spend teaches them what is a necessity and a luxury and how to budget, Godfrey says.

"And if your child feels he can't live without designer jeans, he can spend some of his money to buy them," she says.

Getting teens ready for the wild

A high schooler's financial life should become more adult-like. Levine says stop giving a weekly allowance in freshman year and give a lump sum each month or semester to teach budgeting larger sums of money. When they get a job, outline what percentages go to savings and spending before their first check arrives.

Introduce the concept of fixed-versus-discretionary expenses by giving them monthly bills you expect them to pay such as a cellphone bill or car insurance, Hodgens says.

Dwight says to encourage them to invest and to manage money in their own bank accounts, which you can monitor online. When they start their first job, "open a Roth IRA on their behalf, and match a portion of the money they put into it," Dwight says.

Allowances can be structured in many ways, but the goal is always to teach children the value of money and the skills they'll need to manage it as adults, he says.

"It teaches children how to live within their means," Dwight says. "If they learn when they are young, they're learning in an environment where it's safer to make mistakes."

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