Step 3: Make Saving and Investing a Habit

As anyone who listens to my Oprah Radio show knows (maybe too well) my son recently had his bar mitzvah. He received some gifts in cash. Fortunately, his math teacher, Ms. Beck, timed her lesson on money math perfectly. It hit the week before his ceremony. All of a sudden, Jake wanted to know what sort of interest rate he was earning in his savings account, whether he could do better and if it was compounded daily. (I was impressed! He also told me that when he gets a credit card, he's going to pay it off every month, because—did you know, Mom?—that if you charge $500 and you only pay the minimum, you owe more than $500 the next month? A+, Ms. Beck.)

It's time to learn about interest
As my son learned, your money can work for you just by sitting in the bank or in an investment account. But at different rates. I took Ms. Beck's good work and sat him down at the computer where we surfed to Bankrate.com. On this website, which keeps an up-to-date list of the best savings rates in the country, I was able to show him that the 2 percent interest he was earning at the local bank was less than half the interest he could earn by putting his money with an Internet bank (for example, at that time, HSBC's online savings account yielded 5.05 percent APY. Check out the latest rates at www.hsbcdirect.com.). The trade-off: He wouldn't be able to walk into the branch to make a deposit, he'd have to do it by mail. Jake didn't mind. He wanted the money.

The rule of 72, by the way, is very intriguing to kids! It's an easy way to figure out how long an investment would take to double. If you divide 72 by the annual rate of return, you can roughly estimate how many years it will take to double. For example, if you wanted to figure out how long it would take $1 invested at 10 percent to double, just divide 72 by 10. The answer is 7.2, which is how many years it will take you to reach $2.

So are brain teasers like this one: Which would you rather have, a penny that doubles in value every day, or $1?

Teach the rule of 10 percent
Whether you're giving your children an allowance, they're working for their money, or they get cash gifts for birthdays and holidays (much like you get windfalls in the form of tax returns), now is the very best time to teach them that at least 10 percent of their money should be saved. It's okay—in fact, it's good parenting—to insist on it. Some parents reinforce the message by equipping their children with three jars—one for saving, one for giving (more on that in Step 5), one for spending, or a bank that has several compartments. It helps, but it's not necessary. A jar for saving on their desktop, dresser or a section of their wallet is all they need.

"Why should I do this?" your child will ask. Because even 10 percent of an allowance and birthday gifts adds up. If your child saves 10 percent of his allowance from the time he's in kindergarten until he's a senior in high school, he'll have $473—without interest! If he puts the money in a savings account with a 5.05 percent APY, he'll have about $613. (Note: This assumes the strategy mentioned earlier, in that you start your child off with $1 a week in kindergarten and increase it $1 each year.)

 See how your child's money will grow!

Encourage a stock buy if your child shows interest
Although I am a huge believer in the need to invest in the stock market, I do not believe that all Americans need to invest in individual stocks. Year after year, research shows me that the most consistent route to success in the markets is buying a portfolio of low-cost, broad (i.e. very diversified) index funds. That said, if your child expresses an interest in buying a stock, or several stocks, I think doing so is a terrific way to teach them how the market works, how companies work and how American business works. It is a terrific way to encourage them to read the newspaper. And it is a terrific way to introduce a child who is interested in finance to all the different careers available in that sector.

It doesn't even have to be a huge capital commitment. There are many ways to buy a share or two of a company in which your child is interested. My favorite is Sharebuilder.com, which allows the purchase of even a piece of a single share of stock with fairly low fees (should your child decide he wants to buy Berkshire Hathaway, for instance, Warren Buffett's company, all he may be able to afford is a fraction of a share.) Any money sitting on the sidelines is diverted into a money market fund at a good rate of interest.

Which stock to buy is completely up to your child. My son expressed an interest in Forever 21 after he heard the disk jockeys on his favorite morning radio program (the one we listen to on the way to the bus) rave about how you could buy designer knock-offs at fabulous prices. We checked it out. But yours may be interested in the company that makes their favorite food, owns their favorite sports franchise or produced a favorite movie.

Once you own a share or two, the idea is to follow it. That means reading the newspaper to see what is being said about the company and the people who manage it. It means looking at the stock tables to see whether the price is moving down (compare these movements to how the overall market is doing and talk to your children about why). It means going online to check out what the analysts who make a living following these companies, meeting with the CEOs and predicting whether they'll go up or down are saying. And ultimately, hopefully, it means selling those shares and making a profit that can be plowed into the next great idea. That's how stock investors are born.

Now you're ready for Step 4: Teaching your children the importance of work

Get all the steps to raising money-savvy kids