A recent study by the Commonwealth Bank has found young children have little understanding of where money actually comes from.

The Australian bank surveyed 500 children aged 5 to 16, and found almost half of the five-year-olds thought their parents got free money from a machine in the wall after inserting a card.

One third of the five-year-olds thought there was a person hiding in the machine giving their parents money.

And when it came to online purchases, 18 per cent of seven-year-olds thought games and toys bought online didn't cost a cent.

Justine Davies, a finance editor and commentator at Canstar, says the results are believable.

"I'm only talking anecdotally, but what I hear from financial advisors and parents is that kids just don't understand where money comes from," says Davies.

"I didn't find the results surprising."

She says our world of online transactions and card payments means young children don't get exposed to actual cash, so they don't always understand the value of money.

"We get paid electronically, we pay most of our bills electronically," says Davis.

"At best our kids might see us hand over a debit or credit card at the supermarket, but unless we have taken the time to explain it to them, they have no way of knowing that card equates to cash."

Especially for younger children, Davies says physical cash is important in teaching children the value of money.

"Even if we do explain the whole earning and spending thing to them, our kids aren't getting the reinforcement of that lesson via observation," says Davis.

"So it's very easy for them to think that money just comes out of the wall - or not even think about it at all."

Davies says children are never too young to start learning about money - if they can have a conversation, she says, they're old enough to start learning the basics.

"They can certainly understand that mummy and/or daddy go to work to earn money, to spend on the things the family needs," says Davies.

"They can also understand, if you show them, that a certain amount of money can only buy a certain amount of stuff."

Davies says part of the problem is parents not letting their children learn the importance of saving.

While it might be tempting to chip in to help them buy their coveted Xbox game, Davies says children learn well by having to buy things on their own.

"Once they start school and earn their own pocket money, they will very quickly understand and appreciate the spending power - and lack of power - of a dollar," says Davies.

"I can tell you as a mum of three that the things my kids buy with their own money are looked after far more carefully than the things they have been given."

Given that we live in a world of digital transactions Davies says it's certainly important for children to learn about online spending and saving, but they do need to be a little older.

"Once children reach the double digits they're likely to be online anyway, so they're old enough to understand that online connection," says Davies.

"It's becoming easier because kids are already online these days, they understand to keep passwords safe," Davies continues. "But it comes down to parents teaching their kids when they think they're ready."

Tips for teaching kids about money

Make it visible

"Young children need to learn by observation, so try to use cash to pay for things, rather than a card, as often as you can," says Davies.

She suggests involving them in the grocery shopping by trying to work out how to stick to a cash budget is a good idea.

Give them some power

Even with a couple of dollars, by setting them loose in the local Reject Shop or their school canteen is a great way to let them figure out how to spend their money.

Give them pocket money

Again, it's about giving your child some responsibility when it comes to spending money, but make them put the money towards some of their nonessentials.

"My kids, for example, have to use their own money for tuckshop if they want to buy something, and for toys or iPad apps," says Davies. "It teaches them the opportunity cost of money - competing wants - and it's interesting to see where they put their priorities."

- Essential Kids