Parents have a unique opportunity to teach children the fundamentals of good financial management. Even a young child can be taught the difference between wants and needs and the concept of delayed gratification. Obviously, the best teaching method is by example. How can a young child understand that the money supply is not unlimited if we constantly respond to their every demand?

The art of saving

One of the toughest lessons a parent can share with children is the need to be responsible with their available money. How many adults truly feel that they have enough money? This is probably the first step toward learning to live within one's means and establishing a budget.

Children are smart. From a very young age, they can understand that by saving a little bit from each allowance, they will eventually have enough to buy a large item.

Parents with young children can establish a savings program where, for example, you may match their contributuions. For every dollar the child saves, the parent can match it either dollar for dollar or 50 cents for each dollar or whatever provides the needed incentive to save.

It is possible for a young child to open a passbook savings account with the parent as co-owner. It is important that the child see the amount grow, either by presenting the money directly to the teller and watching the transaction or by seeing the statement of the value of the account. Handing the money to a parent is not as effective as using a non-related, institutional third party.

Opening a savings account is a great opportunity for parents to explain that money in a savings account earns interest while it is waiting in the account. It is often helpful for a child to set a short-term goal for the money, such as a new toy or other inexpensive item, so the goal can be realised in a relatively short time period. Nothing succeeds like success, and it is easier to begin saving toward something else after the first goal has been realized. The time horizon can get longer as the child gets older and understands delayed gratification.

The lessons learned by saving also help children realise that parents cannot buy "everything" they see. It is never easy to refuse a child's request, but we are teaching an important lesson when we say "no" and share the explanation for the refusal.

The lessons we teach our children provide the framework for their savings and financial attitudes for a lifetime. By helping our children learn financial responsibility early on, we're starting them on the path to success.