Making decisions can be tough for kids.  Especially when they’re confronted with two very appealing choices.  I can go to my friend’s sleepover birthday party or attend the premiere to the new Harry Potter movie with my family.

If they choose to go to the sleepover, they’ll be able to hang out with their friends and stay up late.  On the other hand, if they go to the movie, they’ll be a part of an elite group that has insider scoop on the popular new flick.  The choice they do not pick is the opportunity cost of getting the other.

As parents, we want to guide our kids to think through their choices without making the choice for them.  And as difficult as making these decisions can sometimes be, opportunity cost teaches our kids that they can’t have everything they want and that life is full of trade-offs.

The Money Connection: Consider a child who has just received $5 in allowance.  He could spend the money now on hot wheels or he could put his money in his (KidsSave) account and earn interest on it.  Of course, the benefit of choosing the interest isn’t as concrete as the benefit of choosing the hot wheels.  After all, waiting for interest to accrue is not as exciting as playing with a new set of hot wheels right now.

But if we can begin to get our kids to reflect on how the money choices they make today can ultimately benefit them later on, they’ll be better prepared to take on some of the choices they’ll be confronted with one day.  Things like, should I take advantage of my 401(k) plan? or should I set up a (Roth) IRA?

In addition, teaching our kids about opportunity cost helps underscore the difference between needs and wants (do you really need those hot wheels?) and can help reinforce delayed gratification.