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.
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.
Giving children money so they can purchase their own back-to-school items -- such as clothing and supplies -- is a great way to teach them about fiscal management, she added.
Bear in mind that most children model their financial behavior on their parents', so how parents handle their money directly affects how their children will, she said.
Be Honest About Your Finances
The recession has changed many peoples' lives. While parents may be very uncomfortable talking to their children about money -- especially since so many people are either out of work or struggling to pay their bills -- Hobson said the economic downturn provides a good opportunity to address anxiety that their children may feel because of what they see in the news.
About a third of children are worried that their families may not have enough money, Hobson said, citing studies.
If parents have lost jobs or greatly reduced incomes, they should have frank discussions about their new financial reality with their children, Hobson said.
For example, if one parent has lost his or her job, the conversation should acknowledge that, but should emphasize that the other parent is still employed and the family would be OK but would need to cut back, she said.
Children will want to help out in these situations, she said, adding that a good way to do let them do so was to eat out less.
Financial hardship can teach children to be savers, she said, pointing out that it did for children who lived through the Great Depression.
New Government Program
The Department of Education and the U.S. Department of the Treasury have designed an awards program intended to increase high school students' financial literacy, Hobson said.
Through the National Financial Capability Challenge, students will learn the basics of personal finance.
Late this month and next month, students will take a voluntary exam to test their knowledge. Top scorers will earn certificates, while schools and states with high participation rates will get special distinction, she said.
At last count, more than 6,000 schools had signed up to participate, she said. Hobson said she was excited about the program, and said she believed it would be useful for teens.
For more information about the program, go to www.challenge.treas.gov
Mellody's Extra Tips
• When you speak to your children about the family's finances, do not use figures of speech or dark humor. They may actually take it literally. Also, turn off the TV once in a while. Constant doom-and-gloom stories about the economy do not help the situation. If they happen to see one of these stories, explain it to them.
• Even if you are not adversely affected by the downturn, make it a teachable moment. For example, for teens, just showing and explaining articles to them about the foreclosures and bankruptcies could help them understand the importance of not becoming overextended. Even if your child is not directly affected, their friends may be, and your lessons may help your children to better understand their friend's situation.
• Take your children shopping with you whenever possible. It's a good way for them to observe your behavior and it will teach them valuable shopping techniques, such as comparison shopping.
• Be sure to put accounts opened on your child's behalf in their own name, if possible. This creates a sense of ownership. This sense of empowerment will lead to good lifelong money management habits.