Ask your 5-year old where money comes from, and the answer you’ll probably get is “from the bank!” Even though children don’t always understand where money really comes from, they realize at a young age that they can use it to buy the things they want. So as soon as your child becomes interested in money, start teaching him or her how to handle it wisely.

As your child grows into a teen, you’ll find that he or she still needs plenty of advice from you. With more money to spend and more opportunities to spend it, your teen can easily get into financial trouble. So before money burns a hole in your child’s pocket, teach him or her a few financial lessons.

The simple lessons you teach today will give your child a solid foundation for making a lifetime of financial decisions.

For Children

Lesson 1: Learning to handle an allowance

An allowance is often a child’s first brush with financial independence. With allowance money in hand, your child can begin saving and budgeting for the things he or she wants.

If you decide to give your child an allowance, here are some things to keep in mind:

Set some parameters. Sit down and talk to your child about the types of purchases you expect him or her to make, and how much of the allowance should go towards savings.
Stick to a regular schedule. Give your child the same amount of money on the same day each week.
Consider giving an allowance “raise” to reward your child for handling his or her allowance well.

Lesson 2: Opening a bank account

Taking your child to your local bank or credit union to open an account (or opening an account online) is a simple way to introduce the concept of saving money.

Many banks and credit unions have programs that provide activities and incentives designed to help children learn financial basics. Here are some other ways you can help your child develop good savings habits:

Help your child understand how interest compounds by showing him or her how much “free money” has been earned on deposits.
Offer to match whatever your child saves towards a long-term goal.
Let your child take a few dollars out of the account occasionally. Young children who see money going into the account but never coming out may quickly lose interest in saving.

Lesson 3: Setting and saving for financial goals

When your children get money from relatives, you want them to save it for college, but they’d rather spend it now. Let’s face it: children don’t always see the value of putting money away for the future. So how can you get your child excited about setting and saving for financial goals? Here are a few ideas:

Let your child set his or her own goals (within reason). This will give your child some incentive to save.
Write down each goal, and the amount that must be saved each day, week, or month to reach it. This will help your child learn the difference between short-term and long-term goals.
Tape a picture of an item your child wants to a goal chart, bank, or jar. This helps a young child make the connection between setting a goal and saving for it.

Finally, don’t expect a young child to set long-term goals. Young children may lose interest in goals that take longer than a week or two to reach.

Lesson 4: Becoming a smart consumer

Commercials. Peer pressure. The mall. Children are constantly tempted to spend money but aren’t born with the ability to spend it wisely. Here are a few things you can do to help your child become a smart consumer:

Set aside one day a month to take your child shopping. This will encourage your child to save up for something he or she really wants rather than buying something on impulse.
Show your child how to compare items based on price and quality. For instance, when you go grocery shopping, teach him or her to find the prices on the items or on the shelves, and explain why you’re choosing to buy one brand rather than another.
Let your child make mistakes. If the toy your child insists on buying breaks, or turns out to be less fun than it looked on the commercials, eventually your child will learn to make good choices even when you’re not there to give advice.

For Teens

Lesson 1: Handling earnings from a job

Encourage your teen to get a part-time job that will enable him or her to earn money for expenses. Here are some things you might want to discuss with your teen when he or she begins working:

Agree on what your child’s pay should be used for. Will he or she need to help out with car insurance or clothing expenses, or do you want your teen to earmark a portion of each paycheck for college?
Talk to your teen about taxes. Show your child how FICA taxes and regular income taxes can take a bite out of his or her take-home pay.
Introduce your teen to the concept of paying yourself first. Encourage your teen to deposit a portion of every paycheck in a savings account before spending any of it.

Lesson 2: Developing a budget

Developing a written spending plan or budget can help your teen learn to be accountable for his or her finances. Your ultimate goal is to teach your teen how to achieve a balance between money coming in and money going out.

Here are some ways you can help your teen learn about budgeting:

Consider giving out a monthly, rather than weekly, allowance. Tell your teen that the money must last for the whole month, and encourage him or her to keep track of what’s been spent.
Encourage your teen to think spending decisions through rather than buying items right away. Show your teen how comparing prices or waiting for an item to go on sale can save him or her money.
Suggest ways your teen can earn more money or cut back on expenses (e.g., rent a DVD to watch with friends rather than go to the movies) to resolve a budget shortfall.
Show your teen how to modify a budget by categorizing expenses as needs and wants.
Resist the temptation to bail your teen out. If your teen can depend on you to come up with extra cash, he or she will never learn to manage money wisely. But don’t be judgmental – your teen will inevitably make some spending mistakes along the way.

Lesson 3: Saving for the future

Now that your child is a teen, he or she is ready to focus on saving for larger goals such as a new computer or a car and longer-term goals such as college. Here are some ways you can encourage your teen to save for the future:

Have your teen put savings goals in writing to make them more concrete.
Motivate your child by offering to match what he or she saves towards a long-term goal. For instance, for every dollar your child sets aside for college, you might contribute 50 cents or 1 dollar.
Consider increasing your teen’s allowance if he or she is too young to get a part-time job.
Praise your teen for showing responsibility when he or she reaches a financial goal. Teens still look for, and count on, their parent’s approval.
Open up a savings account for your child if you haven’t already done so.
Introduce your teen to the basics of investing by opening an investment account for your teen (if your teen is a minor, this will be a custodial account). Look for an account that can be opened with only a low initial contribution at an institution that supplies educational materials introducing teens to basic investment terms and concepts.

Lesson 4: Using credit wisely

You can take some comfort in the fact that credit card companies require an adult to cosign a credit card agreement before they will issue a card to someone under the age of 21, but you can’t ignore the credit card issue altogether. Many teens today use credit cards, and it probably won’t be long until your teen asks for one too.

Here are some things to discuss with your teen before he or she uses a credit card:

Set limits on what the card can be used for (e.g., emergencies, clothing).
Review the credit card agreement, and make sure your child understands how much interest will accrue on the unpaid balance, what grace period applies, and what fees will be charged.
Agree on how the bill will be paid, and what will happen if your child can’t pay the bill.
Make sure your child understands how long it will take to pay off a credit card balance if he or she only makes minimum payments. You can demonstrate this using an online calculator or by reviewing the estimate provided on each month’s credit card statement.
If putting a credit card in your teen’s hands is a scary thought, you may want to start off with a prepaid spending card.

Teaching your children to be smart with money is a very valuable lesson. And younger generations are heeding that lesson. The average Millennial (age 19-35) is putting away 10% of their income towards retirement saving, compared to 8% for Generation X (age 36-55) and 5% for Boomers (age 56 and older). This is a positive trend that will only serve to help coming generations.

Teaching Your Child and Teen About Money