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Financial Concepts for Your Two Year Old

By Charles Hopkins Published 05/27/2007 | Parenting

You may be thinking at 2? Think about it though. Your child at age two is like a sponge absorbing what is around him. Bad habits regarding money probably have not been learned yet. You certainly cannot teach your child about compounding interest and asset allocation, but you can begin with the basic money concepts.

When your child turns age two begin giving him an allowance. How much? It does not really matter, but you may find it easiest to begin with 2.00 and then increase it 1.00 on every birthday. The key is to be consistent - both in giving the same amount and giving it once a week at the same time. It may be easiest for you to remember to do it every week if you tie it to when you receive your paycheck.

At very young ages you should give your child his allowance in coins. Children often believe these are worth more than dollars. This also provides you with an opportunity to start teaching what each coin is called.

Getting this allowance comes with responsibility. First you must have the child save a portion of it for a long-term goal. 10% (20 cents) goes into a savings account for college. Get your child already knowing that he will go to college and he will not think twice about it when he is older.

Your child should deposit this at your local bank or credit union. You would fill out the deposit ticket, but it is your child that would hand the two dimes and deposit ticket to the teller. Most banks and credit unions have special savings accounts for children with no minimum balances. It is great when the bank or credit union hands out a lollipop since the child associates this "reward" with saving money.

Children also should be taught to be charitable starting at a young age. Promote this by having your child donate 10% of his allowance to a charitable cause. If you regularly attend church it is great to allow him to throw his two dimes into the collection plate. If you are not a regular churchgoer then watch for the charitable organizations that have collection points at the cash registers of the stores where you shop. For instance some animal shelters have little cats and dogs or other containers at the register to put your change into. Places like McDonalds, Burger King, and Wendys often have a spot to save for their causes. Be sure to explain to your child where the money is going and what it will help do.

So now your child is down to having 1.60 left. This is his money to spend. A great place for a child with a little bit of money is a dollar store. He can pick up a new car or she can get a new bouncy ball or hair ties. Make a big deal about this being his money to spend. Make sure he realizes that he only can afford one toy.

What to do with the reminding coins? Create a brightly colored jar or get a piggy bank to deposit this money into. This is to be used when your child wants a larger toy. If he sees something in a catalog that he wants, cut it out and put the picture next to where the money is being deposited. Your child is going to probably want to count this money on a regular basis to see if he has enough. Do that, it is great for giving a math lesson.

Now the key that makes this all work - you do not buy him any toys, games, or videos except at Christmas time and for his birthday. Do not say "no way". What you are teaching your child is delayed gratification. This will work with some effort. You are teaching your child how to save for what he wants. When he is in his teens, twenties or his sixties he will know he has to save for what he wants.

Think about what it would be like not having any credit card debt or a car payment? What a gift that is to your child! Your child is not going to lack for toys. Think about the fun Christmases that you can give him. The toys that he gets for his birthday and Christmas will be more appreciated since there are not piles and piles of toys.

Think about what it would be like to be able to go to the store and not hear "I want that". Your child will very quickly learned to ask "Do I have enough money for that?" rather than saying he wanted something. If he does ask for something simply say he had to use his own money and save for it. Initially if your child is used to getting everything that he wants handed to him it may take some time to unlearn the bad habit. But again, two year olds are like sponges. They can just as easily learn good habits as bad!