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2 Things You Have To Teach Your Kids About Money

Source: Flickr / 401(k) 2012.

If you have children, they will likely learn everything they know about money, saving, and investing from you. The unfortunate reality is that most schools simply don't teach kids about personal finance.

In fact, a recent survey found that just 3% of teenagers reported learning what they know about saving and spending money in school, and 95% acquired their knowledge from their parents.

Because you want to give your kids every advantage, there are certain things you'll want to make sure they understand before they leave your house and go off to college, or out into the world on their own. 

How to live on a budget
Many young adults are somewhat shocked the first time they're expected to pay their own bills. Between rent, electricity, cable, Internet, water, phone, and other recurring expenses, the cost of basic living expenses can be pretty overwhelming at first.

It's very important to instill the concept of a budget at a young age. Many parents do this with an allowance, but in order for this to be successful; you need to be firm about the rules of the allowance.

If your kid runs out of money a few days early, so be it.

On that note, it's a good budgeting exercise to give them more money at once, but at less frequent intervals. For example, instead of $25 per week, give $100 per month. The first time they run out of money with a couple of weeks to go, it'll go a long way toward teaching them how to budget.

Credit cards and what to do with them
The average U.S. adult has nearly $5,000 in credit card debt, and the total is much higher in many cases. It's easy to charge things to their credit cards, assuming it'll be easy to pay back a little at a time.

However, many college students are shocked to learn that a $5,000 credit card tab could take more than 20 years to pay off if they just pay the minimum payments. It is very important for your child to understand how credit cards work and how to use them responsibly.

The key is to let them learn about the dangers and trappings of credit card overuse on their own, but while they are still living under your guidance.Make sure they know how much interest they'll end up paying. A good way to get them used to it is to get them a credit card with a relatively small limit (say $300 or $500) when they're a teenager, and make a point to look over the bill with them every month so they can see just how much interest they're paying on those clothes they just "had to have."

If your kid maxes out a $300 card, it could be a great lesson on interest and how much the debt will actually cost them over time. On the other hand, if they go out on their own and run up $20,000 in debt, it could be a life-changing mistake.

Source: Wikimedia / Alex Morin.

Let them make mistakes
This one might seem counterintuitive, but sometimes the best way to learn something is by messing it up the first time.

Let's say you give your 14-year old son his $100 monthly allowance, and he decides to go buy a very expensive pair of jeans he's had his eye on. Don't try to stop him. Let him make his choice, then deal with the consequences. It's better to let him experience the "I shouldn't have bought that" feeling now, and to learn from it, than in 10 years when he blows his paycheck and can't pay his rent.

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Matthew Frankel

Matt brought his love of teaching and investing to the Fool in order to help people invest better, after several years as a math teacher. Matt specializes in writing about the best opportunities in bank stocks, real estate, and personal finance, but loves any investment at the right price. Follow me on Twitter to keep up with all of the best financial coverage!

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