Teaching children the financial facts of life

By default, parents are usually the primary source of a financial education. However, many young people may receive allowances - or even sizable inheritances - without a sound base of knowledge in saving, budgeting, investing and financial planning. To help the children in your life develop a responsible attitude about money, I think it might help to consider these points:

Be a role model: There is a significant relationship between the way children view money and your own spending habits. Instead of viewing money and personal finance as a forbidden topic, discuss your own financial goals and plans. The level and amount of information shared is up to you, but bring the younger generation into at least a portion of your plans. How you deal with money issues - from the monthly bills to planning the family vacation of a lifetime - is important as a long-lasting lessons about money management and the value of money.

Encourage savings and investments: One of the simplest ways to encourage a responsible attitude about money is to encourage children to save. This could include designating a portion of a child's allowance to a savings account, or making gifts of cash directly to an account in their name. Discuss account statements together, and stress the concept of "paying yourself first" with dedicated, regular deposits. For younger children, set modest, attainable savings goals. For older children, encourage the development of a long-term savings plan for the purchase of a large-ticket item like a computer or car. Consider an occasional "matching grant" to encourage regular deposits and help keep goals visible. Take the time to explain basic investment types such as cash instruments, stocks and bonds. Make investing interesting by engaging in conversation about companies that provide popular children's products such as toys or clothing.

Develop a sense of financial empowerment: Developing responsible spending habits means encouraging well-thought-out choices. Guide and advise rather than dictate how money should be saved and spent. Keep goals visible with pictures or create charts that plot the growth of funds needed. Take children on window-shopping trips to compare prices and products and adopt the mindset that every trip to a store is an exercise leading to a potential purchase. To limit impulse buying, consider instituting a rule that prices and products are compared at a minimum of three locations.

Give unto others: Involve children in your financial decisions regarding philanthropy. Discuss the merits of gift applications you may have received and weigh the advantages and limits of each. Explain the tax advantages of charitable giving but, at the same time, stress the altruistic goals of giving. Even a contribution to a canned food drive or the creation of a holiday basket for a needy family can grow into a family-wide event. By helping children contribute time or money to a charitable cause, you can teach them that money is important in ways other than personal consumption.

Developing a sound knowledge of basic financial practices can often go a long way toward helping the children in your life achieve lifelong financial security.

• William Creekbaum is a senior investment management consultant at Morgan Stanley Smith Barney LLC. Contact him at 689-8704 or William.a.creekbaum@smithbarney.com.