Can Your Kids Handle Money? Start Teaching Children to Spend and Save Wisely

Many people don't discuss the basics of money with their children, but given the downturn in the economy, it's more important than ever to teach children financial responsibility.

Mellody Hobson, president of Ariel Investments and "GMA's" personal finance contributor, appeared on the show this morning to discuss how parents can teach their children to save and spend wisely.

VIDEO: Mellody Hobson explains how to talk to your kids about money.
Teaching Kids Financial Responsibility

When to Start the Lessons

Hobson said parents should start teaching their children to be money savvy as early as age 5. The conversations should be basic, as simple as teaching the difference between coins and bills, or using games and Web sites to teach children an understanding of bartering.

For example, parents can ask girls if they'd like to trade a Barbie doll for a cupcake. This, she said, is an early way to demonstrate the value of items, and it gives children an idea of how financial transactions are conducted.

As children get older, the conversation can become more sophisticated, she said. Several Web sites teach children about the fundamentals of money and money management. Among them is www.mint.com, a site that has interactive tools and games for teens and younger children.

Use Real-Life Lessons to Explain Spending

Most experts say spending and saving responsibly are the two most important aspects of money management that children need to be taught, Hobson said.

Her own mother taught her about spending by making her pay the bill whenever they went out to a restaurant, Hobson said. She said it taught her many things: In addition to building math skills -- counting, making change, checking the bill and calculating the tip -- she learned the relative cost of things.

For example, she understood that a hamburger and fries at a fast-food restaurant cost a fraction of a meal in a fancy restaurant. When she ordered an $8 glass of orange juice at a hotel once, her mother explained that she could have purchased several gallons of juice for the same sum.

Give Young Children an Allowance

Hobson urges parents to give children an allowance when they are very young. She said part of the allowance can be for immediate needs, and the other part should be used to achieve a long-term goal, such as purchasing an iPod, for example. This way, children are introduced to the idea that they need to save for the future.

With that foundation, it's easier for them to think about saving for retirement when they're adults.

Hobson said she likes the idea of matching their savings, just like in a 401(k) savings plan. If parents tell children they'll receive a quarter for every dollar they save, the children will get to their goal that much faster and they'll learn financial patience and how to delay immediate gratification for a long-term financial goal.

CLICK HERE to get Mellody's extra tips on how to talk finance to your children.

Children Learn from Parents' Practices

Parents can start teaching their children financial responsibility by involving them in their own expenses. For older children, this means their cell phone bill.

Hobson said she was amazed at the number of children who had no idea how much their cell phone bills cost. Every child should understand their cell phone's plan and cost, she said, adding that the average American teenager sent 3,146 text messages during a three-month Nielsen study in 2009.

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