Teaching children how to handle money responsibly is one of the most important things a parent can do to prepare them for adult life.

Helping kids understand the value of money from an early age can provide the perfect platform for financial prudence when adulthood comes around.

While everyone’s financial circumstances are different, the theories behind managing money generally boil down to a few simple factors.

These include spending within your means, planning for the future and understanding the dangers of taking on unnecessary debt. Read on as we look at five ways you can teach children about money.

Set a good example

Children often mimic the behavior of their parents, so setting a good example is hugely important if they’re to learn good financial practices. If you are living beyond your means this is a surefire way to ensure that your children fail to grasp how to manage money properly.

Teaching your children to manage money responsibly takes time and requires patience, but the long-term rewards are well worth the effort Financial expert and businessman, Dave Ramsey, believes parents should start teaching children about money from an early age.

“A study by the University of Cambridge found that money habits in children are formed by the time they’re seven-years-old,” he said. “Little eyes are watching you. If you’re slapping down plastic every time you go out to dinner or the grocery store, they’ll eventually notice.

“Or if you and your spouse are arguing about money, they’ll notice that too. Set a healthy example for them and they’ll be much more likely to follow it when they get older.”

Show them how money can make more money

Many children find that the concept of saving their money rather than spending it instantly is a difficult one to grasp.

Whether it’s their allowance, birthday money or income from a part-time job, lots of youngsters splash their cash almost as quickly as they receive it. However, opening your kid’s first bank account is an important step on the road to showing them how to manage their money properly.

Financial consultant, Jim Brown, says that showing children how money can make more money simply by saving it is an invaluable life lesson.

“When my oldest daughter saved up enough money, we relocated her cash from a piggy bank to a local bank,” he told CNBC. “‘Congratulations! You’re putting your money to work’, I said. Even though the process makes complete sense to you, it might be too abstract for some children.

“That’s why it’s important to explain – in layman’s terms – how their money is earning more money (passive income) and how that additional money will continue to generate even more money (compounding). These are concepts and skills that will serve them for life.”

Teach the difference between ‘wants’ and ‘needs’

“I want it now!” The culture of instant gratification is a dangerous one, particularly in respect of children and money.

Most parents will have dealt with sulking and tantrums after refusing to buy something that their child demanded, but it’s important to teach them that they can’t have their own way all the time. Modern advertising techniques and peer pressure have ramped things up a notch, making it increasingly difficult for children to understand the difference between what they want and what they need.

Lois Carlock, education manager for Ent Federal Credit Union in Colorado, says that teaching children how household budgeting works is the key to preventing excessive demands.

“Kids see so much advertising that tries to make them think they “need” that toy, game or even a vacation,” she said. “Once children understand the mission of advertising, it’s easier to explain everything they see is usually a want.

“Talking about how important it is to budget for needs, like a place to live, warm clothes and good food to eat, can help them understand why these things have to be paid for before anything else.”

Don’t exclude kids from money discussions

Many parents make the mistake of being secretive with their kids about their personal finances and household budget. However, being more open about income and expenditure can help children gain an understanding of how money works.

Going into minute detail might be a little overwhelming, particularly if the children are really young, but the aim is get them feeling comfortable about dealing with money matters. Finance specialist, Leif Kristjansen, told NBC that the best way to teach your kids about money is to bring them in on family budget discussions.

“They will see how you responsibly handle all of life’s pile of bills and issues,” he said. “Kids naturally want to emulate their parents, so they will start to think about spending and how to minimize it.

“Usually, we have the talks before dinner because we are all in the same room but we are open to discussions whenever they arise. Our talks involve reminders between my wife and I to check or pay the bills or to move money into investment accounts.”

Explain the dangers of getting into debt

Understanding the difference between using credit and racking up debt is an important lesson, particularly for children who are about to become adults.

Credit cards can be a great way to build up your credit score, but used incorrectly they can quickly lead to financial hardship. While it can be tempting to pay for things on credit, it is crucial not to rack up unnecessary interest charges or penalties for late repayments.

Natasha Rachel Smith, financial expert at TopCashBack, says parents should ensure their children understand how debt works.

“Teach your kids while they are young that credit cards aren’t just magical pieces of plastic that pay for things,” she said. “Credit cards have due dates and, if you misunderstand the rules, you can be penalized by having to pay more money.

“My parents also stressed the importance of good debt versus bad debt. It is okay to accrue debt when it is good debt. Investing in a mortgage – provided the property was purchased at a reasonable, affordable price – is good debt. Where you can account for precisely and exactly where the money was spent is usually good debt.

“Frivolous spending is bad debt. Do not buy things you simply want – focus on the things you need alongside sometimes treating yourself to the items you want.”

This article was written by Susan Paige from Saving Advice and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.