When you think of your kids and money, what's the first thing that comes to mind? Okay, yes, they are expensive. What's the second thing? Perhaps your mind turns to allowance and, by extension, how kids learn to earn money, spend it and save it. If your children are older, you may be thinking about how they will eventually earn it when they join the workforce.

Money concepts begin to develop when a certain level of cognitive readiness paves the way for numeracy, learning how to count and recognize denominations of money. As soon as kids are old enough to consciously observe their parents' spending habits, they begin to form similar impressions of the value of money. Essentially, what kids need to learn about saving money, making it grow and spending it wisely begins at home.

How can we help kids differentiate needs, wants and wishes and prepare them for making solid financial decisions? When I was growing up, I learned the value of a dollar through trial and error. I was encouraged to earn money through babysitting and summer jobs in my early teens. Yet as I progressed to more substantial jobs through college and university, my knowledge of comparison shopping, bargain hunting or, for that matter, saving and investing came from the experiences of daily life, observing those around me and lessons learned from my more savvy friends.

This is sort of like learning about sex on the fly — not necessarily the approach we want to be taking when we could be helping to prepare our kids for a healthy financial future.

Children's understanding of money concepts increases with age, as shifts occur in their cognitive development. One perspective, based on the theories of the late developmental psychologist Jean Piaget, suggests that children's quantitative abilities before age 6 or 7 are rudimentary at best. At some point between 5 and 7, both their interest in and a rational understanding of money increase dramatically. By 7, children become especially interested in money and are much more reluctant to part with it.

Even before starting school, children build up a considerable amount of mathematical knowledge through experiences and interactions in familiar everyday routines that form the context of their early cognitive development. The early learning that takes place within the home environment provides an important base on which future learning will be built in school. And of course, school will teach numeracy and mathematics, but it is up to parents to teach kids monetary values and strategies for saving, spending, investing and, hopefully, staying out of debt.

The toddler years: 12 months to 3 years

For many kids, experience with money of "their very own" begins with an allowance. Allowance has not been a steady feature in our household; we have opted instead to make purchases when the need (or desire) arises. Yet an allowance can be a useful tool regardless of whether your child is old enough to spend it. Some recommend associating allowances for toddlers with an event rather than a regular schedule. For instance, an upcoming outing provides an opportunity to give your child a set amount of money to spend. Determine ahead of time how much you are going to make available to your child for spending, and stick to your limit.

The best way to avoid the "buy me" syndrome is to encourage behaviour that eliminates it from an early age. If you really want to make your toddler beam, provide him or her with a wallet or purse — some prefer a hand-me-down from mom or dad. This will teach them to keep their money in a safe place.

As with other socially learned behaviours, children will develop values about money based on observing how we save it and spend it. Shopping with your child offers opportunities to make distinctions between things we want, things we need and things we wish for in the future. As they learn to help you with grocery shopping, they can be learning how to purchase the items of best value.

Preschool: ages 4–6

The lives of preschoolers are increasingly directed by rules, and so they will quickly come to learn that a desired item requires an exchange of money. Playing "store" is a great way to interact while teaching your child money concepts. At this age, you want them to experience the relationship between buying and spending. Continue with the strategies you used when they were younger and talk to them about your own purchases and decisions that affect what you buy.

Allow them to put the coins in the parking meter so that they can relate the payment of coins to the cost of parking; little kids love doing this. This is also a good age to begin discussing products advertised on television, in stores and in print media. Children are often the target of these ads, after all, so better they learn to master consumerism early.

Developmentally, preschoolers understand the idea of saving when they see and touch an amount of money, and they begin to see money as a way to get things they want. That said, they generally see all money as having the same value and might think coins have more value than paper money. They will tend to observe and imitate parents' spending habits, and this is tricky at a time when they cannot be expected to curb their own spending impulses. They are often not fully aware that they need to pay for items they see in the store.

Middle childhood: ages 7–12

Children of this age will be learning a lot about numbers in school, including how to work with different denominations. They begin to associate money with excitement, have a growing interest in it and recognize that money is valuable and "belongs" to people.

These are the years when it is important to teach kids how to save. They will provide you with natural opportunities for this lesson as the list of items they wish for but cannot afford grows. Help them to save their allowance or holiday money toward a special item. This teaches them the benefits of planning for an expenditure and the success associated with saving over time. They also understand that things cost different amounts and so will learn to make sense of prices and determine whether they have enough money to purchase what they want.

Children of this age also develop greater social awareness and learn that some children and their families have more money than others. This is an important time to talk to them about core family values and what really matters. They are now capable of long-term planning for spending and saving — over a year, for instance. They're interested in finding ways to earn money and are excited at the prospect. They have come to understand that money is limited but continue to need guidance to know the value of things.

To help a child of this age develop monetary skills consider providing them with a learning allowance. The amount should be appropriate to the child's age and the family's income, and it should be regular so that your child can rely on it coming on a particular day — $5 on Saturday for instance. You can give them money in denominations that encourage saving: $5 given as five loonies, with one loonie to be put aside in savings. Saving teaches kids a way to get what they want or need and introduces them to the "pay yourself first" concept.

Note that a learning allowance should be controlled by the child. You could encourage common sense by using the "spending-by-choice” technique, which involves selecting at least three things the money could be spent on, setting aside money for one of the items and then making a choice of which item to purchase. Household duties should be perceived as a child's contribution to the family, but you could offer pay for extra work that is needed around the house or in the community, such as helping with a family renovation project or shoveling snow for elderly neighbours.

This is also a good age to learn real-world skills such as opening a bank account, making deposits and withdrawals at the ATM, and paying for purchases by direct debit. Where children store their money for safekeeping can become even more important, especially if they are industrious babysitters or parents' helpers and are earning money. They can start to keep track of the money spent and saved and learn to use a spreadsheet at the same time, allowing them a visual record of the money flow — this can be a very powerful tool.

Teenage years: ages 12–18

The lives of teenagers begin to change with middle school, and expenses also make a shift. Teens may need to manage purchasing transit passes; contributing to cell phone expense; and buying lunches or snacks on school days. Then there are the social expenses, such as movies, clothes and desired items that will keep them in good standing with their peers. These, of course, are all negotiable and should be discussed ahead of time and with firm expectations. These discussions allow you to be open about the family's finances so that your teenager can set realistic expectations about your ability to support his or her expenses and spending habits.

By discussing costs and teaching them the concept of borrowing money, say for a car or house purchase, teens learn that borrowing costs money; that borrowed money needs to be paid back; when it is and isn't appropriate to borrow money; and the idea of credit limits. If you decide to lend your teen money for a purchase, never lend them more than they can repay, which would force you to forgive the loan. Keep the amount realistic for their financial means.

Having a way to earn money enables teenagers to learn job responsibility and gain a sense of industry and personal accomplishment. Earning teaches kids a sense of freedom and recognition; financial independence; work standards and habits; how to evaluate job alternatives; and the relationship between money, time, skills and energy. Depending on your family situation, they may even contribute to family expenses in their late teens and early twenties.

Teenagers have an even greater need for an allowance, but there should be rules set out in order to avoid difficulties. This is the time to increase the learning allowance to cover essentials, like school supplies, transit passes, basic clothing. You may choose to make more expensive purchases together, such as coats, boots, bikes, and such. If they haven't yet obtained a bank card, now is the time. You could also introduce lessons on managing credit by getting them started with a card that has a $50 limit. Opportunities to spend money independently teach kids the differences between wants and needs, how to compare alternatives, how to make decisions and assuming responsibility for them, and how to keep records of their expenditures.

After-school jobs might be a good idea, but it will depend on your child's level of success in school. You definitely don't want to encourage this if it will jeopardize their academic progress. Some kids are able to juggle both, and for others it may be an economic necessity. As for summer jobs, your child may be the type to want and find their own, or they may not be interested at all, preferring to spend the summer months "playing" with their friends. Again, this decision is one to be made by individual families, who are aware of their values and family situation and who know their child best.

Whatever strategies you use to help your child develop good money skills, you need to consider their developmental abilities and the family, peer and social context. Parents are an important resource for teaching these skills, and there are some very good resources that kids can access on their own. I recently picked up Nancy Holyoke's A Smart Girl's Guide to Money: How to make it, save it, and spend it published by American Girl. I wasn't sure how interested my 12 -year-old would be, but it was worth a shot. Lo and behold, she's reading it, and I hope she'll have some things to teach me when she's done.

Dr. Melanie Barwick is a registered psychologist with a primary role as a health systems scientist in the Community Health Systems Resource Group at the Hospital for Sick Children in Toronto.

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