Lending Money - Children should be taught the difference between borrowing money and money that they earn or receive as allowance. When you lend your child money, explain that it will have to be paid back. Set up a repayment schedule and stick to it. You may even want to charge a small amount of interest on the loan. This is an important lesson for your child's future when funds they borrow - by means of credit cards, bank loans, mortgages or lines of credit - come with interest charges, firm repayment deadlines and consequences for missing them.
Giving allowance - Giving your child an allowance will give them practical experience in financial responsibility.
Sit down with your child and discuss how their allowance should be allocated. First, your child should "pay themselves" and put 10% of their allowance into a savings account. A portion, perhaps 20% could go into long-term savings, another 20% could go into short-term savings (for "wants" such as special clothing) and the rest can be spent as they like. Some families may wish to have their child allocate a portion to charity.
Children are never too young to learn and practice budgeting. Although they may not earn much of an income, it is important they understand budget basics.
Start a budget
When children begin making some financial decisions on their own they should be introduced to budgeting. The Youth Budget Sheet is a simple and straightforward way for children to track what they earn and spend each month. Walk your child through the budgeting process and help fill out the budget sheet every day. After completing a month, go through the budget and talk about ways to increase earnings and savings and decrease spending.
A simple start
It can be a tough switch for children to go from having no budget to budgeting all of their money. When your child starts budgeting, make it simple. Have them write down all of the things they purchase in a month, the money they put into savings, the money they consistently earn (allowance), and an estimate of the money they could potentially earn (from gifts or odd jobs). Once they have everything recorded, put each item down as income, savings or expenses. From here, they can make an estimate of how much money they will need next month. As they get more comfortable with doing this you can start breaking those categories down a bit, for example, expenses may be broken down into "essentials," "clothing," "entertainment" etc.