Smart money: 7 ways to raise a financially literate child

By Marian Wilde

GreatSchools asked the Gallos to describe these seven steps for our readers.

Step 1: Encourage a work ethic.

Eileen: We think that it's really important for children to develop a work ethic. That involves helping kids to focus on schoolwork and to contribute by doing family chores. Extracurricular activities are also very important - if the child is not over-scheduled - because kids learn how to work with others as a team. Also, part-time jobs are appropriate, if the kids are old enough.

Jon: There's a fascinating study out of Harvard which studied adult mental health. It studied not what makes people mentally ill, but what makes people mentally healthy. One of the findings was that the single biggest predictor of adult mental health was the ability to develop a capacity to work between the ages of 6 and 12. What Harvard calls a capacity to work is what we call a work ethic, namely the ability to be able to feel that what you're doing is important, that you're responsible for what you've accomplished and what you've failed to accomplish. So by helping our kids develop a work ethic between the ages of 6 and 12, we're really helping them to be better prepared for life. Our eight points are really designed to help our kids to grow up to be responsible, self-sufficient and happy adults.

Step 2: Get your money stories straight.

Jon: What we mean is to understand your own relationship with money. As parents we're teaching our kids about money all the time by the way we deal with money. It's really important that we as parents understand what money means to us psychologically and emotionally. Is money something that scares us so we try to avoid dealing with it? Is money a scorecard for us? We recommend that parents actually sit down and figure that out.

In some cases what money means to you is something that you don't want it to mean to your kids. If you grew up in a family in which your parents went through bankruptcy two or three times, or one of the parents was a compulsive gambler and they lost the house, then money can be a topic that is filled with frightening emotions. If that's what money means to you, you won't want to convey those emotions to your kids.

Step 3: Facilitate financial reflection.

Eileen: If you give a child an allowance you're giving him the opportunity to reflect and to think about the consequences after spending the money. "Am I happy with what I bought? Now I don't have enough money to buy this other thing. Maybe I should have done something differently." It gives them practice in making decisions and making choices, and in really experiencing consequences.

Jon: We make the comment in the book that children are naturally impulsive. Kids often do things without thinking about the alternatives. "Could I have done something else and what would have been the consequences if I did?" Our point of facilitating financial reflection is to help kids to learn to think in terms of choices, alternatives and consequences. That's something that you can start doing when they're quite young, like 3 or 4 years old. It's a skill that is helpful to them their entire lifetime. You can use an allowance to help kids learn to think in terms of choice.

Eileen: Parents need to answer questions that kids ask. "Are we rich? How much did this house cost?"

Jon: "Why can't I spend my allowance on anything I want? Why don't we take vacations to Europe every year? Why don't we buy a new car every year?" Kids ask questions about money and parents should be able to answer them.

Eileen: And have discussions. Ask the kids questions. Find out why the kids want to know this. Explore why they're asking this question right now.