I would wait until my child was a little older, but i see no problems with this as long as she's explaining things to her in a way she understands at such a young age. The earlier they learn some type of responsibility the better.
Her mistake is teaching her child to rent instead of own.
At the child's age the mother should just put all the money in some kind of interest bearing account/cd. As the child gets older start to implement age appropriate money management lessons.
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