Mellody's Math: Making Money Childs' Play

April 25, 2002 -- If you're bringing your daughter (or son) to work today, it might provide a wonderful opportunity to teach your child that working for money is quite a bit different from having your money work for you.

After the tour of the office, cafeteria and vending machines, consider taking the following steps to introduce and instill the value of investing in your children. While there are no guarantees when it comes to investing, time spent teaching your children about this topic is certain to yield positive returns.

Money Games: While 96 percent of American adults believe basic economics should be included in high school curriculums, it's only taught to 40 percent of American high school students.

Financial learning skills can start early with simple board games like Payday and Monopoly. Nothing beats the great American classic Monopoly for basic lessons in real estate, taxes and general finance. These games are also a great way for the entire family to get involved in investing and savings and spark a money discussion.

Piggy Bank: It is easiest for someone to learn a foreign language when they are young. The same goes for investing. To this end, instead of just giving your child an allowance, set-up your own "family 401(k)" and explain to your child you will match a portion of the money they put in their bank.

You can take this concept a step further by dividing up their savings into separate pools of money for different types of expenses. Encourage your child to think of a portion of their savings as money they can spend on day-to-day items like soda. Another portion could be used to save for future purchases. The remaining amount should be labeled off limits and used strictly to invest for the future.

Keep in mind it is not the amount but the idea of helping them understand the value of savings. After your child has saved enough money in their personal bank, take them to a neighborhood bank to open a savings account in their own name.

The Soda Phenomenon: The best way to illustrate the power of investing to children is to put the money and saving in real terms. A lesson in compounding and budgeting can really hit home if you show your child a simple example, such as soda pop.

The average American teenager drinks nearly 500 cans of soda a year. If you can convince your child to give up something like soda for the year and invest the savings in a mutual fund, the money can really grow.

With the cost of a can for 75 cents, the cans quickly add up to about $375 a year. Assuming a 10 percent return on a yearly investment of $375, in 10 years, your child would have over $6,949, and in 20 years would have over $23,625!

Or you can substitute a couple of new sweaters or pairs of "must-have" jeans to show your children how much money could be saved. While most adults find it very difficult to stick to a budget, illustrating to your children the potential savings opportunities with everyday items can help encourage both parent and child to start budgeting.

Retiring Child: One of the best things you can do for your child's long-term financial security is to enroll them in their own Roth IRA. Starting early and taking advantage of a tax-deferred investment program are two smart ways to build a secure retirement. When investing in an IRA, your investment grows tax-free and can therefore compound at a faster rate.

While your teenager may have things on his or her mind other than investing for their retirement, they will be thankful you encouraged them to start an IRA when they reach 65. If your teenager were able to save $2,000 a year from age 14 to 18, their investment would be worth $1,184,600 (assuming a 10 percent return) at 65.

Children must have a job to contribute to their own IRA. While it would be ideal to encourage them to put their earnings from babysitting or shoveling your neighbor's walks, it is not necessary for their actual earnings to go into the account. Parents and other relatives can fund the IRA, as long as they do not exceed what the child earned during the year. The parent or guardian acts as the custodian for the account, until it is turned over to the child at 18 or 21, depending on the state of the child's residence.

Stock with a Bow on Top: A simple stock investment in a company your child understands is a wonderful way to get them involved in the investing process. For example, buying stock in McDonalds Corp., Mattel, Inc. or Toys R'Us makes it easy for a child to understand the connection between the stock and the company.

Instead of buying your daughter a new doll or outfit from the American Girl Place, buy her stock in Mattel and let her keep the dividend checks. While she is likely to grow out of the doll phase, she never will get tired of receiving checks in the mail.

Mellody Hobson, president of Ariel Capital Management in Chicago, is GoodMorning America's personal finance expert. Click here to visit her Web site, ArielMutual Funds.com. Ariel associates Matthew Yale and Anne Roche contributedto this report.