Our two children, Sunny who is six, and MJ who is three, don’t understand what their dad does for a living quite yet. But my wife and I have started to teach them some good habits and instill some simple principles that we hope are sinking in. Good money habits begin with the basics and, hopefully, lead to a way of thinking about money that will last a lifetime. Here are some ideas you may want to teach your kids:

1. Understanding needs vs. wants. Your child may think they “need” a new toy, but as parents, it is our job to help our children understand it is actually a “want.” That is a very important first lesson that can be applied throughout a lifetime as a foundation of smart money management.

2. Nothing in life is given – if you want something, you have to work for it. Working hard is how you get what you “want.” Start your kids on an allowance at an early age and help them understand that to be able to do the things they want to do, they need to earn that right by working for it.

3. As your children get older, teach them that money is earned by providing a value. The value can be in creating a new product that people like to use or simply by providing a service that people are willing to pay for – washing cars, moving lawns, etc. Almost all successful entrepreneurs got their start by figuring out how to earn money from their neighbors and friends.

4. Pay yourself first. Teach your kids that every paycheck you earn is a way to secure your future. It is important to contribute 10 – 20% of what you make to yourself in the form of automatic savings. If you wait to save what is left after you pay your expenses and satisfy your “wants,” you most likely will not save anything at all.

5. Illustrate the power of investing and compounding interest. Earning money on your money is the most powerful way to compound wealth and is how the wealthy get wealthier. It can best be illustrated to a child by asking this question: If you were given a choice to receive $1 million dollars in one month, or a penny doubled every day for 30 days, which one would you choose?

I think even most adults would be surprised to learn that a penny doubled every day for 30 days would be worth more than $5 million after 30 days. That is the power of compounding interest.

Day 1: $.01
Day 2: $.02
Day 3: $.04
Day 4: $.08
Day 5: $.16
Day 6: $.32
Day 7: $.64
Day 8: $1.28
Day 9: $2.56
Day 10: $5.12
Day 11: $10.24
Day 12: $20.48
Day 13: $40.96
Day 14: $81.92
Day 15: $163.84
Day 16: $327.68
Day 17: $655.36
Day 18: $1,310.72
Day 19: $2,621.44
Day 20: $5,242.88
Day 21: $10,485.76
Day 22: $20,971.52
Day 23: $41,943.04
Day 24: $83,886.08
Day 25: $167,772.16
Day 26: $335,544.32
Day 27: $671,088.64
Day 28: $1,342,177.28
Day 29: $2,684,354.56
Day 30: $5,368,709.12