08/15/2011 10:38 am ET Updated Oct 15, 2011

Seven Ways to Teach Your Grandchildren the Value of Money

Young people are our country's greatest natural resource. They are technologically savvy, confident and diverse. They are creative, expressive and well educated. Unfortunately, they are also often -- no other way to put this -- financially illiterate. A recent Journal of Consumer Affairs study found that nearly three out of four Americans between the ages of 23 to 28 are unable to answer basic questions about economics and investing.

And though financial illiteracy is not specific to the young, the consequences for them are particularly severe in an era of six-figure college loans, high unemployment and shrinking health and retirement benefits. Combine it all with the worst recession in a generation and you've got what financial journalists call Generation Debt.

Of all the lessons we can impart to our grandchildren, the value of a dollar is one of the most important. Here are a seven ways to teach your grandchild about fiscal responsibility and help instill sound financial habits:

1. Start Early. If a child is old enough to count, she is old enough to learn about money. Find teachable moments like a trip to the bank or ATM to explain what people do to earn money. Teach your grandchild that people have to work hard for money, but that those who save and invest well put the money to work for them. Show her how simple and compound interest gives money the ability to grow on its own for them. Play financial board games, either the old standbys: Life and Monopoly or newer games like Thrive Time or Charge Large.

2. Distinguish Between Income and Wealth. Stress that it's not what you make, but what you keep. Let her know that people with large incomes can still become "poor," if they don't save or invest properly. Share stories about lottery winners who wind up penniless and multimillionaires who end up in bankruptcy. Describe how average people can "get rich slowly and steadily" by intentional saving and smart investing.

3. Balance a Budget. According to FINRA Investor Education Foundation, 20 percent of Americans spend more than they earn, and just 42 percent spend less than they make. Teach your grandchild how to set a budget. Discuss the difference between needs and wants; encourage delayed gratification. Then give him a money management challenge. Take him to the grocery store with a shopping list and $20. Show her how to use sale circulars, coupons and generic products to make the money stretch further. Put what's left over in a jar, and when enough accumulates, let her deposit it in her bank account or use it to buy a special treat.

4. Beware of Plastic. Let your grandchild know that if not used responsibly, credit cards can be hazardous to his wealth. Explain how the credit card companies make money, using examples he can relate to. For instance, let's say he bought a $230 PlayStation® using a credit card and took five years to pay it off, making the minimum monthly payments. At the average interest rate of 15%, that PlayStation would wind up costing him $315.

5. Reward Savings. Demonstrate the concept of compounding interest by opening a savings account with your grandchild. Make it function like a "kiddie" 401(k) by offering to match 50 cents for every dollar she saves for herself and agree upon a "vesting" period that supports her savings goal. (Note: It's important to allow some withdrawals; otherwise a child may be discouraged from saving at all.)

6. Play the Market. Involve your grandchild in the stock market by showing him the investment opportunities that are around him -- whether it's Kellogg's or General Mills at breakfast, Kraft or Hershey at lunch; Disney when on vacation or Apple and Nike when at the mall. Buy your grandchild shares in a company he knows and tell him he now owns part of the company. Teach him to look up the stock symbol, and follow its progress together. I've done this with each of my children.

7. Share the Wealth. In addition to imparting the concepts of saving and investing, don't forget to show your grandchild the importance of giving. Bring her along when you donate items to the local food bank or volunteer at a homeless shelter. Talk about causes or organizations she might want to support and check out different charities online. When you give your grandchild a monetary gift, offer to match any portion of it he chooses to give to a charity. This instills in him not only a sense of duty but a sense of gratitude for his material blessings.

Taken together, these small lessons can produce big results -- laying the foundation for financial literacy as well as long-term financial success.

This information in this article is general in nature and may not apply to your own financial situation. Please consult your professional financial advisor regarding this information and your own personal financial needs. For a complete disclosure statement, please see my biography.