(USAA Magazine Winter 2006, By Janet Bodnar)
Parents are in the best position to teach their kids about money. But where to begin?

Perhaps the shortest question I've ever been asked was this one-liner: "At what age do you start turning an ordinary little child into what you term a money smart kid?"

The one-line answer: at whatever age an ordinary little child starts showing an interest in, and asking questions about, money. I feel compelled to add, however, that far from pushing kids to grow up faster, I consider myself a pulling parent, keeping them young as long as possible. There's no point in trying to make your child into a little Peter Lynch or Bill Gates or running your family like an accounting firm. When it comes to financial issues, as in everything else you discuss with your kids, your role is to satisfy their curiosity in an honest and age-appropriate way.

Dealing with money is such a natural part of life that you don't even have to set aside extra time to talk about it. Instead, you can take advantage of situations that crop up every day. When your child begs to press the buttons on the ATM, use the opportunity to tell her how the money got there in the first place. Dragging your children to the supermarket becomes more pleasant for all of you if you keep them busy scouting out the best deals.

A visit to your office opens the door to a discussion of where the money comes from to pay the household bills. Your ultimate aim is to turn out independent adults who know how to manage money and have a healthy regard for what it can and can't buy.

Preschoolers and young kids

With preschoolers you'll have to start with a less lofty goal - for example, how to tell the difference between a penny, a nickel, and a dime.

Let 3-year-olds choose among those three coins, and they'll almost invariably choose the nickel because it's the biggest. Let them choose between a quarter and a dollar bill, and they'll take the quarter, which, after all, you can spin, flip, drop into a bank, and stack with other coins. Abstract concepts are beyond the grasp of most preschoolers. They focus on the concrete and so should you, showing them what coins look like and how they can be exchanged for other things.

By second grade, children no longer prefer a nickel over a dime, and they can even make a stab at counting change. But they still have trouble taking in the big picture about money. My friend, Bonnie, who specializes in teaching students about economics, learned a lesson or two from her own daughter, Morgan. When Morgan was 8 years old, her mom convinced her to put a $10 birthday gift in the back by reminding her that she could draw it out again if she wanted to buy something. Would the bank give her the same $10 bill, Morgan wanted to know. Her mother explained that she would get a $10 bill but not the same one, because the bank had already used that one to lend to other people. Morgan was appalled. In her mind, the purpose of a bank was to keep her money on a shelf until she was ready to take it out.

Despite their misconceptions, children this age are eager to learn from you, so take advantage of the influence you still have.

The teen years

By the time children become teenagers, they're hemorrhaging cash; kids between the ages of 12 and 19 are spending more than $170 billion per year of their own and their parents' money. And today's teens aren't exactly babes in the woods when it comes to things financial. They are, after all, children of the revolution that has popularized personal finance in recent years. Trouble is, what they know is often just enough to make them dangerous:

Checking accounts

Teens know for example, that checking accounts exist, but they don't always know how to balance one. That old joke about not being overdrawn if you still have checks is sometimes painfully on the mark. One college faculty member who has counseled students on financial matters recalls a student who came to her in tears while clutching a sheaf of checks. The student feared that the checks had bounced, but they were actually cancelled checks that had been returned to her routinely by the bank.

Credit Cards

Teens know how to use a credit card to buy things, but they're not always clear on how they're supposed to pay the bill. They think plastic is just another form of currency and don't understand that using a card is like taking out a loan. So they're vulnerable to the experience of one of my neighbors, who went off to college, ran up $600 in credit card debt, faithfully made the minimum monthly payment, and then suddenly realized she wasn't making a dent in paying off the bill. Her parents eventually bailed her out.

Saving

Teens know that saving money is a worthwhile goal - especially to pay for the expensive college education their parents have been fretting about for years - but for many of them CD means compact disc instead of certificate of deposit.

Planning for college actually provides a convenient opening for parents to introduce their kids to the fine points of budgeting, saving, and even investing. Yet when parents seek advice on how to pay for college, "very few of them bring their kids when they come to see me," one financial planner told me.

That's partly because they're naturally reluctant to discuss the family's financial situation with their children - and partly because they often share their children's casual attitudes toward budgeting, credit, and saving. But now may be the last chance for the whole family to shape up before the kids graduate and go off on their own, either to manage a household and pay bills they didn't even know existed or to attend college, where credit cards are as easy to get as pizzas at midnight - and just as habit-forming.

Excerpted from Janet Bodnar's book, "Raising Money Smart Kids" (Kaplan Publishing, 2006)