3 Budgeting Rules Every Parent Must Teach Their Kids

It’s never too early to start teaching kids the nuts and bolts of money management and the sooner they learn positive financial habits, the better. A survey from T. Rowe Price, found that 69% of parents said they’re extremely or very concerned about helping their kids learn to manage money but only 25% actually make budgeting a topic of family discussions. If you’ve got kids, here are the top budgeting lessons they need to learn now.

1. Spend less than you earn

Teaching your children how to live on less than what they earn is one of the most basic of all budgeting rules. Unfortunately, judging by the fact that total credit card debt in the U.S. is expected to reach $1 trillion by the end of 2016, it’s one that plenty of adults still struggle with.

So how do you make kids understand that spending more money than they’re making is a bad idea? You lead by example. If you’re in credit card debt because of bad spending decisions you made early on, paying those balances down should be a top priority. The other part of the equation is avoiding racking up new debt for things you can’t really afford in the first place.

You can also give kids some context by explaining what it takes to maintain your family’s standard of living each month. You don’t have to get specific with the numbers but you can tell them what percentage of your income is required to cover housing or food, for example. That can give them some perspective on how much things really cost.

2. Needs and wants are not the same

Needs and wants are two different things and it’s important for kids to figure that out early on. They need to know that needs are the things that come before anything else while wants are the extras. If they don’t understand that distinction it’s going to land them in hot water once they’re out on their own. They have to grasp that bills need to be paid first before they spend money on shopping or hanging out with friends.

Breaking down the categories of your budget can help them see what needs and wants look like in black and white. On the needs side, you should have things like housing, food, utilities, transportation, insurance and medical care. On the wants side would be eating out, new clothes, vacations, extracurricular activities that you pay for or hobbies. Giving them that framework can help them distinguish between the two for themselves more effectively.

3. Make saving a priority

“Pay yourself first” is an oft-repeated budgeting mantra and if your child’s not a natural saver, that’s something that may be harder to get on board with. The easiest way to show kids the importance of the savings habit is to give them money of their own that they can be responsible for.

For example, if your child gets an allowance you could use the 70/20/10 rule to help them develop the savings habit. For adults, the rule looks something like this: 10% goes to debt, 20% goes to savings and the remaining 70% is what you’d use to cover your expenses. With a child, you could do the same split but have the 10% be money that you invest on their behalf or that they give to charity.

To make it more effective, give them a way to keep track of what they’re saving. Just sticking the money in a piggy bank each week isn’t going to have the same impact as putting it in a savings account or money market account where they can see the balance going up. Watching their money grow can be a great motivator to keep saving through childhood and beyond.