I am not sure how I learned the simple rule of “Spending less than you earn.”  But I learned it.

I suspect it was a lesson taught by example.  But, I don’t know.   I know many people that as adults have completely different spending habits than their parents.

Never-the-less, it is always better to constantly reinforce those behaviors you want your kids to grow into.

All things being equal, it is most likely that our financial habits will rub off on our children and influence their relationship with money later in life.

But what may be surprising is just how young children start to form financial habits. Adult money habits are set by the age of seven, according to a study by behavior experts at Cambridge University and published by Money Saving Advice.

Many children are growing up in debt-ridden households. As of September 2014, the average household owed $7,281 on their credit cards, according to NerdWallet.com’s analysis of Federal Reserve statistics. Looking at just indebted households, that number rises to $15,607 in average credit card debt per household. That’s a collective $880.5 billion in credit card debt that American consumers owe.

These numbers make debt seem like the norm in most American households, but it’s definitely not ideal. Talk to your kids about finances from an early age, teaching them the value of a dollar and most important, leading by example. Practice good financial habits and keep an open dialogue about money and personal finance. Maybe then they won’t have to learn the dangers of debt the hard way.

Allowance

I talk to a lot of people that think the answer is giving them an allowance.  They believe Learning to live within your means can be a tough financial lesson that some adults never learn. They believe that giving your child a weekly allowance simulates a salary and can teach them how to budget.

“A weekly allowance teaches children delayed gratification by having the money last them the week. Living within means can protect kids from racking up credit card debt in the future,” according to Dan Meader, CEO and founder of Allowance Manager, an online and mobile tool that teaches kids money management.

I disagree with this thinking.   Using an allowance as a “salary” sets exactly the wrong behavior.  Managing one’s money and living withing one’s means is completely different than working to earn a salary.  It is like saying we should pay our kids to eat healthy or exercise or make learning a life long habit.  We should be teaching our kids that eating healthy, exercising, and learning are habits that must be adopted because they are good habits in and of themselves, not because there is some financial benefit to them.

A kid should learn that cleaning their room is something that should do because it is the right thing to do, not because they get a “salary” to do it.  Because, if the kid does not need the money, then why clean their room.  A kid should learn there are specific requirements for living and they are not driving by financial reward, they are driven because they are the right things to do.

By tying allowance to specific tasks, like a salary, you reinforce the idea that good behavior is financially driven.

You should give kids an allowance, but that allowance is specifically to learn to manage their money, not as a ‘salary” for work performed.

The allowance should be given with the following guidance.  You will provide the kids food, clothing, and an education.  They can use their allowance for anything you do not provide.  If they want a new video game and you do not want to provide it, they can save their allowance and buy it themselves.  As a parent you need to decide what is it that your kids should be thinking of as “extra” and help your kids save their allowance to get it.

Honesty

You need to be honest with your kids about your financial situation.  (Of course that means you need to be honest with yourself, something I think is lacking with many people, which is why they are in the financial situation they are in.)

Learning, from a parent first hand, that sometimes you have to weigh financial decisions and you can’t always just buy anything you want is valuable lesson. Hopefully, with the groundwork laid, 20 years down the road when your child has to decide whether to buy a new TV or pay their rent, the decision will be easier.

When your child gets old enough, it could be helpful to share your list of expenses with them so they can begin to understand the idea of financial responsibility and the difference between wants and needs. They will start to realize that the older they get, the more “needs” they will have and the less money they can spend on “wants.”

Once your kids are old enough, you can begin to introduce the idea that the money they have is not limited an allowance. “Develop kids to be entrepreneurs at an early age,” Meader said. “It’s great to start a business with your children. Kids can start side businesses of their own by focusing on their hobbies and channeling their creativity.”

Debt isn’t the only concern you should have for your child’s financial future. Make sure they start with an accurate and clean slate. The Federal Trade Commission recommends checking if your child has a credit report around their 16th birthday. That way if there are any errors or fraudulent information, you have time to clear it up before they apply for a job, take out student loans, or need to rent an apartment. Some identity thieves target children because they know it’s less likely their credit is being monitored and they may be able to go undetected for quite some time.

I’ve heard it said that “as a parent that finding the time to teach our kids these financial lessons can be challenging.”  I disagree.  This takes no time.  In fact, it you are honest and live a financially responsible lifestyle, then teaching this to kids takes not extra time at all.  It is simply what you do.