Financial literacy is developed over a lifetime, so don’t think you have to teach your kids everything at once. To get them started on the right path, we advise that you begin by teaching your children these three basic things about finances:

1. Save money

Starting with a classic piggy bank, give your kids a mechanism for setting aside extra money. Get started as soon as possible to help them develop this habit.

Remind them regularly to set aside some of their money into savings—don’t let them raid the piggy bank every time they want something. Also talk to them about keeping their money in a secure.

When they’re young, you’ll just want to encourage them to save any spare change they have, but later you’ll talk to them about setting savings goals and setting aside a fixed percentage of their income. But that won’t happen with a piggy bank!

As soon as they’re old enough to have a bank account, set your kids up with a custodial account at your local credit union or bank. You can set up these accounts where you control the funds until the child is 18 or 21, depending on the state you live in.  Many financial institutions also offer special programs for young people, such as a free savings account, so check into those as well.

The purpose of this account is to teach your kids about banking in a low-risk way, so let the account be sole funded by your kids’ contributions.

Stick with this, and be sure your kids are contributing regularly to savings. If you don’t get this habit ingrained in them early, it will be much harder to develop later on.

2. Live with a written budget

Once your kids are ready to start spending on things they want, start teaching them about written goals and budgets—involve them in your family’s household goals and budget if you can. Effective planning and budgeting are keys to financial success and learning about this as they begin to spend their money will instill a strong behavior into adulthood.

Until your children are old enough to have an independent job, we advocate using an allowance tied to regular chores to reinforce the relationship between work and income. Certain tasks around the house like keeping their room tidy, etc. are simply part of being a member of the household, and there is no allowance for that. The chores (age appropriate) are what the allowance covers, and when they don’t do their chores, they don’t get paid – just like the real world. When you hand them their allowance, remind them to consult their written budget before they allocate the funds.

Your kids are likely tech savvy, which can help you. Encourage them to try budgeting apps or use spreadsheet software on their tablets and smartphones. For a review of 15 Budgeting Apps read here: https://www.gottabemobile.com/best-budget-apps/ A free budget spreadsheet can be found here: https://credit.org/download/

Next time they ask you to buy them something, you can ask them, “Can you afford it?”

When it comes to small spending, let your kids make their own decisions, as that’s the best way they’ll learn. Even if they make some budgeting mistakes, stick to the process and teach them that budgets have to be flexible.

If they spend all of their money and don’t have enough to cover everything they have budgeted for, this too is a teachable opportunity. Let them learn about the consequences of going outside of their budget, which could be the costs of borrowing money from you or going without until they have enough funds. If you choose to cover the difference, use that too to explain about the additional costs of loans and use of credit.

An important lesson for everyone to learn is that most overspending isn’t buying things you don’t need, it’s from paying too much for things. So if your kids struggle with the limit of their budgets, that’s a good opportunity to teach them to comparison shop, wait for sales, buy used, rent the snow ski (vs buying one), etc.

3. Know how to borrow

Today’s college graduates face many financial challenges. Student loan debt is at all-time high levels, and starting incomes are insufficient for many of them to meet their loan payments. This is a tremendous issue to be aware of, and one you should take seriously to prevent your kids from facing too much student loan debt.

It is important to teach your children how to borrow wisely – this is an essential lesson for them to learn. They need to know that borrowing money isn’t always a bad thing, as it allows people to make large purchases, such as homes, automobiles, start businesses, etc.

That doesn’t mean it’s a good idea to sign your kids up for credit cards—in fact, it’s just the opposite. Kids should buy things with cash so they always associate purchasing with money, and that money should be earned and budgeted.

Ultimately, you will want your kids to know that borrowing can be done responsibly, but should only be done with careful thought and with an absolute plan to repay the money borrowed on a set schedule—that means if you loan any amount to your kids, you have to be firm about demanding repayment in full and on time—their lenders later in life will not be flexible with them, so you shouldn’t be either.

When they’re old enough, teach them about credit scores, interest rates, and how using credit cards impacts the true cost of the things they buy.

Take a free online personal finance course in budgeting, or spend time helping your kids develop the basic financial skills they will need for a lifetime.

Also, try out this free and very intuitive budget template that gives real-time advice based on spending habits (it’s just like having your very own financial advisor) to help your kids save money and take control of your finances.

Here’s the guide on how to use it and get started: Make Money and Save Money With This Free Student Budget Template.

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