Children aren't born with an understanding of how money works; all parents learn that one quickly. A young child sees the things they want or need just appear from Mommy and Daddy. The fact that Mommy or Daddy gave money to the sales clerk means nothing to them. So how do you teach your kids about money?

You have to consider your child's age first. My daughter, for example, is three, going on four. Right now she knows the names of the various coins, but the difference in value between a dollar and a quarter, for example, is completely unclear to her.

To help her learn, we are letting her spend just a little bit of money. We gave her a $3 budget to buy her baby brother a birthday present a couple months ago. She struggled quite a bit finding presents in her price range and had to settle for something other than what she had wanted to buy for him. Specifically, she wanted to buy a farm for him, but most of those we saw were in the $20 price range. She finally found a variety of small gifts that fit her budget. She was so delighted to be able to give the cashier the money we had given to her.

Now, obviously this taught her very little about the value of money. She didn't have to earn it, and she really didn't understand why some things cost too much. But it was a very early lesson in sticking to a budget.

You need to decide when you give your children money and why. Some parents prefer to give a regular allowance with no association with getting chores done, etc. Others have a set rate given provided chores are done, while still others have a set rate per chore completed. There's no right or wrong way, but you do need to be clear on when your kids get money. Don't forget to consider ways in which your kids may earn extra money.

Also consider making rules on how allowance may be spent. Many families have their kids put their allowance in multiple containers - one for immediate use, one short term savings, one long term savings, one for charity, or any combination of containers. Saving money is a habit many parents have trouble keeping, but it is a great one to teach your children.

By the same token, try to avoid teaching your kids to rely too much on credit. Some parents will let their kids borrow money against their next allowance. Now, managing credit well is a vital skill, but it is one best saved for after kids have managed to learn how to save money well, in my opinion. On special family trips it may be appropriate to loan your child some money, but if it something that can easily be bought later it is far better that they learn the value of saving toward a goal.

But there are more ways to teach your kids about money than giving them an allowance. Talk to them about what things cost when you go to the grocery store. Go over what each item costs, and if buying by weight, explain how buying more means you pay more, and that you only want to buy what will actually be used. This is also a good time to teach them about quality, and how to look for the best produce. Children are very proud when they find food that is worth buying and may have a good eye for things once they have been taught what to look out for.

Don't forget to teach them about coupons! Once your child is old enough to not throw them around, he or she may be good at keeping track of your coupons and making sure you remember to use them.

As your kids get older you should help them to build a more realistic picture of what things cost. Have them write the checks out for your bills - or, if you have automatic payments as many people do nowadays, go over your statements from your various bills so that they can see how much everything is really costing you.

Managing money well is a vital life skill and one that children can begin to learn at a very young age. You don't have to have your finances in good order before setting a good example for your child. In fact, teaching good money habits to your child might just help you to take a look at how you are spending your money and help you to improve your habits. This is one habit that your kids will be grateful to have later!