Teaching children to save and invest

Teaching children about money doesn't have to be complicated.

Make money lessons part of everyday life: That's the advice of Jayne Pearl, co-author of Kids, Wealth and Consequences: Ensuring a Responsible Financial Future for the Next Generation. In doing so, you'll raise kids who, as adults, can maintain stability through financial peaks and valleys and learn from their mistakes.

Teach your child the basics with the following tips.

Earn money

Start simple. Show your child how to earn money. It can be small to start; for example, a dollar for each grade of school that the child is in, paid once a week. Encourage them to divide the money between spending, savings and charitable giving.

Set financial goals

Help your child come up with a goal for savings. Just ask what the child wants that costs more than, say, their weekly allowance. Help them figure out the best way to save. For example, should the child save all of the allowance for the number of weeks it would take? Half of the allowance for twice the number of weeks? The allowance plus birthday money?

Giving a few different options shows children they have some control over the best way to reach their goals.

Open a savings account

Once a child understands how saving works, you can add another lesson about investing. You can show how compound interest allows money to accumulate faster than it would if left in a piggy bank. As a next step, help the child open a simple bank savings account. The child can contribute money from allowance, gifts and jobs such as shoveling snow or babysitting.

This is also a good time to talk about the difference between wants and needs, Pearl advises, and you can make it a fun lesson. Define wants and needs (such as a safe place to live, food, clothes, education and medical care). When you and your child catch each other saying "I need" versus "I want," the guilty person puts money in a jar, which can later be put toward a shared want or a charity.

Look for teachable moments

Put your discussions into action by letting them apply those skills through real-world application:

• While shopping, pay for one purchase with cash and the other with a card. Explain that the credit card is not free money, and you'll have to pay the bank back later.
• When your child asks for an advance on their allowance, explain they'll have to pay it back by a certain date, just like you do with your credit card.
• Never hide a financial struggle from your kids, tell them, "Every family — no matter how wealthy or poor — goes in cycles, up and down," says Pearl. Together, brainstorm ways to trim expenses, like making pizza instead of ordering out or building a snowman instead of going to a movie.
• Pearl let her son keep his school lunch money if he made his own lunch the night before. He also made savings charts and posted pictures of goals. "If he saw something else he wanted, I would say, 'Well, you can buy it. But if you do it's going to take longer to save up for your goal,'" says Pearl.

You can also help children follow investments by reviewing account statements with them, showing them how to do financial research on the Internet and answering their questions about money. If you get them interested early on, they'll have skills they can use for a lifetime.