When Sarah Willson's five-year-old son, James, begged her to buy him a $99.99 T-1 Typhoon helicopter Lego set, she told him if he saved up the money, she'd pay the taxes. James faithfully plunked his $2 allowance into a mason jar every week and did extra jobs around the house to get closer to his goal. After Mom taught him to add up his money on paper and with a calculator, he even posted a running tally of how much he had saved.

Six months later, mason jar in hand, James spilled out his coins on the toy store counter and walked away with his coveted Lego set. “He was beaming from ear to ear,” says Sarah.

James learned some powerful money-management lessons that day – the value of steadily saving toward a goal, working hard for what you want and paying with cash (principles many of us grown-ups have yet to grasp).

In an age when it appears that money magically spits out of bank machines and we buy stuff with the simple swipe of a plastic card, it can be hard for our kids to recognize the value of a dollar. That's why it's important to think about the money skills you want your child to have by the time he or she is 18 and start laying the groundwork today, says Alyson Schafer, a parenting expert in Toronto.

“It's like developing baseball skills: you have to practise. And the earlier you start, the better,” adds Joline Godfrey, author of Raising Financially Fit Kids (Ten Speed, 2003). Here are six ways you can help your child master money management.

PROVIDE AN ALLOWANCE
WHAT TO DO: Regardless of what you give them (the range is generally 50 cents to $1 each week for every year of their age) the key is to talk about what they are expected to do with it. Decide together how much they should save and how much to set aside for charity and let them spend the rest as they see fit.

At each step along the way, decide on which items your children can pay for instead of you. A six-year-old could buy his own treat after the soccer game, for example. Schafer's daughters, who are 11 and 12, both get $10 a week and are expected to pay for birthday presents for their friends.

If your teen is clamouring for an $80 pair of runners and you're only prepared to spend $40, have her contribute the balance from her allowance. It may make her think twice about whether those shoes are worth it.

TIP: Don't expect your kids to always spend their allowance wisely. “Parents want to give all this advice and save their kids from making mistakes,” says Schafer. “But we have to let their mistakes be lessons.”

THE PAYOFF: Karen Hobson, a nurse in Point Claire, Que., gives each of her three teens $55 a month and expects them to pay for all their entertainment, clothes and shoes with this money. “They've really learned how to plan ahead and they never blow their money,” says Hobson. “Our kids don't waste things, they've learned to be thrifty and they will shop second-hand. But best of all, they seem to be more appreciative than other kids.”

Stress the need to sock it away
WHAT TO DO: Most financial experts agree that saving 10 per cent of our income is a good idea, and this goes for kids, too. Give your child a piggy bank and take her to the bank periodically to make a deposit. Having a bank passbook will help her see the money grow, and you can explain the magic of interest. You can also encourage your kids to save a portion of any money they receive as gifts or from doing extra chores.
To motivate your kids to save, increase their allowance only when they have proven they can stick to their savings goal. As an added incentive, reward them if they save a certain amount. For example, you could chip in $1 or $2 for every $5 or $10 saved.

TIP: Talk to your kids about what they are saving for and encourage them along the way. By their early teens, kids are ready to create much longer-term goals, such as saving for an end-of-school-year trip.

THE PAYOFF: Having the discipline to save and live within one's means are great life and financial skills. Once your kids acquire these skills, they'll become more independent and self-reliant.

Teach them how to budget
WHAT TO DO: Use everyday exercises to help instill budgeting basics. Your six-year-old can help you find the best price on ice cream at the grocery store. Your nine-year-old can carry around a calculator to help you add up purchases, while your 13-year-old can plan her budget for an upcoming summer trip and open and keep track of a chequing account.

TIP: Kids need to understand that there simply isn't an unlimited supply of funds to spend, so as they mature, share details of your family's budget with them. Explain how you set aside money for savings, pay the bills and use what's leftover for spending. Talk about how you only have so much disposable income and that if you buy pizza every Friday night, you won't have enough left over to go to the movies together. “Never be afraid to tell your kids ‘we can't afford it,'” adds Godfrey.

THE PAYOFF: Kids learn the difference between needs and wants when you model good budgeting practices and teach them to comparison shop.

Encourage your kids to earn extra income
WHAT TO DO: While the experts say it's not a good idea to tie allowance to regular household chores, you can create “extra-credit” jobs to give your kids a chance to earn more money. Let them clean out the van and pay them for the time they spend on the task. As kids get older there are lots of ways for them to earn extra cash: babysitting, garage sales, cutting grass for the neighbours, etc.

TIP: Help your child turn a passion into a business venture. If your daughter loves dogs, she could start a dog-walking service; if your son collects trading cards, he might want to sell some on EBay.

THE PAY OFF: “Connecting work with earning money is valuable in developing responsible work habits and acquiring discipline,” says Godfrey. “Those who start early have an easier time mastering these skills than kids who aren't required to work until after high school or university.”

Help them understand debt
WHAT TO DO: “If you buy something for your child on your credit card, show him the bill when it comes in and explain how you must pay for the item now, even if at the time you just handed a card to the store and it looked like nothing was happening,” says Godfrey. And make sure that your kids know prepaid cards such as phone cards cost money to buy upfront and need to be used wisely.

Godfrey also advises charging interest if you loan money to your kids. “It can be a low rate, but you
want to remind them that borrowing costs money.”
Once your teen has mastered the art of saving, budgeting and balancing a chequebook, a bank debit card or prepaid card can be a good trial experience before getting a regular credit card. If you let him practise with this kind of plastic, he may fare better when he heads off to university or enters the working world.

THE PAYOFF: A good credit rating will make it easier for your children to find their first apartment and get better rates on insurance when they start to drive.

Walk the talk
WHAT TO DO: Be a good financial role model. Think about the messages you're sending your kids. Do you live at the mall and stock up on stuff you don't really need, or shop smart and limit those impulse buys?

TIP: Talk to your kids regularly about the importance of paying bills on time, long-term savings, etc. “You have to talk about money with your kids in the same way you talk about sex and drugs,” says Godfrey.

THE PAYOFF: If you act as your kids' personal money mentor and teach them how to manage their finances, chances are they will take those lessons with them when they leave home and – bonus! – won't be calling for bailouts.