Bagged lunches…crisp clean notebooks….new clothes…kids across the U.S. have headed back to school to learn new math, geography and history concepts. One lesson they won’t be taught in the classroom, however, is arguably one of the most important for their future success: How to smartly and responsibly handle money. That is a lesson left to parents, who do not get a lesson plan.

And yet this lesson is so vital to our children becoming well rounded adults. They need to know basic concepts like how to budget their money, why debt is dangerous and how to make their money grow.  Not only is this good for them, but it’s good for the economy and society as well.

Children learn about money way before their first allowance. They pick up bits and pieces every day: parent’s reactions to bills, taking money out of the ATM, using coupons. It’s hard to know what to teach your child and when. Thankfully there are a few general money concepts every child should learn.

Even before your child can talk they are asking for things. Infants cry when they are hungry. Toddlers point to show you what they want. By the time he/she is three or four they’re constantly saying, “Mommy can I have X” and “Daddy I want Y.”  A child has a natural sense of entitlement. “I am, therefore give to me.” The job of every parent is to teach their child that hard work will get them what they want, especially when it comes to money.

So many people in our society have a sense of entitlement when it comes to money. People expect the government to feed them (food stamps), give them affordable housing (section 8 housing), care for them when they are sick (Medicaid), even to help fund retirement (Social Security). Perhaps this sense of entitlement is one of the reasons our nation’s debt is expected to hit $17 trillion by the end of this year.

If you give your children everything they want, of course they are going to feel entitled. Its Christmas therefore you owe me presents…It’s time to go back to school therefore you need to buy me new clothes…I turned 16 this year therefore you should buy me a car. Kids like these are in for a rude awakening once they go out into the real world.

I plan to teach my children that they shouldn’t expect anything to be handed to them. I will not give them an allowance or buy them their first car. Both of which would just reinforce a sense of entitlement.

I will however allow my child to earn money by doing jobs around the house. They can mow the lawn, shovel snow off the driveway, walk the dog around the block, make their beds every day, wash the dishes after dinner, etc. And I’ll certainly co-sign a loan for my child to get a car, provided he has a job and can afford the monthly payments and insurance. Each of these things I think will teach my child the connection between working hard and earning money to buy the things that you want, rather than just expecting things to be handed to them.

It’s equally important to teach our children about debt and alert them to the dangers of borrowing money. I worry that many people in today’s society don’t realize just how expensive going into debt and borrowing money is.

More and more people see financing as a way to live the kind of lifestyle that they’ve always dreamed about. They lease a car so they can get a nicer car than they could otherwise afford, they want to upgrade to stainless steel appliances in their kitchen so they finance them rather than save up for them.

The truth is debt is expensive. Whenever you borrow money you are getting a raw deal. To show your kids the dangers of borrowing money illustrate for them the true cost of the debt. Explain to them how much they’ll actually be paying for the item over the life of the loan. For example, borrowing $100,000 over 30 years at 6 percent interest means you’re really paying about $216,000. You end up paying more in interest than you do for the principle. Plus the home is worth only half of that amount. Doing it this way takes the emphasis off the interest rate, which is the main thing people pay attention to, and puts it on the true cost of the loan. It can open up a child’s eyes to what really constitutes a good deal.

Now if you’re going to show your child the dangers of borrowing money, then you should also show them how their money can grow if they save it. If you want to encourage good money habits with your children explain to them the magical powers of compound interest.

If you ask a child if they’d rather make $10,000 per day for 30 days or a penny that doubled in value every day for 30 days, they’d likely answer the $10k a day option. When in reality option B is the much more lucrative deal. The power of compounding interest turns that penny into nearly $5 million versus the $300,000 they’d make with the $10k a day option.

For this reason, compounding interest is often seen as the eighth wonder of the world. That may be stretching it in my book, but it certainly needs to be said that compounding interest over time is a very powerful financial tool. And because children have the benefit of time, they stand to gain the most from using this tool.

Explaining to children that investing your money early will yield you the highest return on your money is easier when you tell them stories like the one I just told you about the penny versus $10k a day for 30 days. You can further illustrate that point by talking to them about investing their money dividend paying stocks that will compound the interest over 40 to 50 years, turning their meager investment into millions of dollars. The most important part being that the earlier they start, they richer they’ll get.

Teaching your children about money doesn’t need to involve rigorous lessons at the dinner table every night. Instead use every day occurrences as teachable moments to teach your kids values and beliefs about money. When you go to the grocery store, use it as a moment to teach your child about value. Which is a better deal: 5 bananas for $1 or 2 for 50 cents? When your child receives money for their birthday make them put a percentage of it in their savings account to teach them the importance of saving. Explain to your child that you pack their lunches instead of giving them money to buy lunch at school because this allows you to afford other things for them like new shoes or that video game they really want. In the end you’ll have raised a well-educated, financially savvy individual who will be well on the road to riches that they can be proud to earn themselves.

Good luck!

Keeping Money in Your Pocket,

Nancy Patterson