My daughter is two, and she loves money. She knows that pockets are for money—and likes to make sure that her pockets are always loaded. She understands that money is used to buy things—and she likes to be the one to actually hand over the money.

At this point, that’s about the extent of her financial savvy. That’s fine for a two-year-old, but there are 10-year-olds who don’t have much more understanding of finances than she does. Talking about money with your kids in an age-appropriate way can help ensure that they grow up with a solid understanding of both how money works as well as how to manage it.

Starting the Conversation

My daughter and I live in a cash-heavy country, so every purchase I make is with cash. Making more cash purchases is something I’d recommend for parents of young kids who want to start the money conversation. Young kids really only understand tangible items, and if you pay with a credit card all the time, it’s hard for them to understand what is going on.

As your kids are learning how to count and how to read numbers, talk to them about how much each bill is worth. When you make a (small) purchase, let your child count out the number of dollars to hand over, and let him or her get the change and check that it’s correct. If they are very young be careful with coins they can swallow, and be prepared to have a bill or two ripped or crumpled.

Of course, you’re also teaching your kids basic math, not just financial literacy. That’s great, because financial literacy depends on a good grasp of math.

The Elementary Years

By around the age of six, most kids had mastered the basics about money, and can make simple cash purchases on their own. It’s also around this age that kids can start earning money, saving money and even ‘investing’ money. In all likelihood, your kids are also starting to have more ‘needs’ that require money.

First of all, start by helping your kid find opportunities to earn money. This can be by earning money from you by doing chores (not everyone thinks this is a good strategy, btw—after all, how much do you earn by doing chores?) or by helping him or her find age-appropriate entrepreneurial ideas—taking care of pets for neighbors, a lemonade stand, etc.

This is also a good time to set up a bank account for your kid, either with you (The Bank of Mom or Dad) or a real bank account. If there’s a particular item he or she wants, talk about how much money they will need to buy it, and help him or her calculate how many glasses of lemonade will have to be sold to reach the goal (fun fact: I remember saving up for an inflatable raft when I was around 7. Shockingly, the raft I bought held up until I was in my thirties.

It’s also a good time to start imparting values about what percentage of income should go towards saving, spending and giving. A six-year-old is able to understand all of those concepts.

You lay the foundation for your kids’ knowledge base about the world in the early years of his or her life—and finances are no different. As they get older, the conversations will become more complex, but having a good grasp of how to allocate income, how interest works and how to earn money will give your kid the foundation to understand Finances 201.

In summary, ways to introduce the concept of money to children toddler through elementary school age:

1. Show your kids money so they know what it looks like and what the relative values of each coin and bill are.
2. Let them pay for small things in cash, collect the change and verify it is correct. Good math skills and responsibility building here.
3. Give them chores or a small allowance so they can have money of their own.
4. Introduce the concept of a wallet and a bank to protect their money.  The wallet is for "walking money", and the bank is for "saving money".
   1. At home you can keep a special box or piggy bank with their savings.
   2. Also open a savings account for them at your local credit union or bank with you as the custodian.  Experiencing going to the bank, making depositions and checking the balance is a great way to impart financial responsibility at a young age.
5. Discuss basic budgeting. For example you could use the $2 you have now to buy candy, or you could save up and buy that really cool set of roller blades if you wait until after your birthday (including the cash you'll probably get from Grandma).
6. Let them know that money is a tool, like a flashlight or a vacuum cleaner, but also a way of storing value. Money itself is not bad or good, but it can be used for good things, used for bad things, or plain wasted.