Think Junior won’t notice that mounting debt and empty retirement account? Think again. According to a 2001 survey by the American Savings Education Council, 94 percent of children ranked their parents as their primary financial educators.

Kate Fitzgibbon still sees that trend today. “Kids really pick up financial literacy from their parents and that’s a scary thing considering where our country is right now with the savings rate at an all-time low,” says Fitzgibbon, spokeswoman for the children’s financial literacy Web site Planet Orange, a program run by ING Direct.

“One of the most important things parents can do is teach their kids good money-management skills and model those skills themselves,” say Fitzgibbon.

Today’s parents face many challenges, including teaching their children good financial habits. These four fiscal lessons are a good foundation for your kids’ sound money management in the future.

Differentiate between needs and wants

The first lesson is often the hardest: Learn the difference between basic and discretionary spending.

“Parents need to explain that things you don’t think about, like electricity and water, cost money,” says Fitzgibbon. “When kids ask for a new video game system, that goes into the ‘want’ category, not the ‘need’ category.”

Statistically, fewer and fewer parents are directly discussing the difference between needs and wants. Capital One reports that in 2006, only 43 percent of parents had spoken with their children about the difference, a figure more than 20 percentage points lower than that of the year before.

Neale S. Godfrey, author of “Money Doesn’t Grow on Trees: A Parent’s Guide to Raising Financially Responsible Children,” says parents can help kids understand basic-needs spending in two ways.

First, incorporate children into the spending process by showing them exactly how much it costs to run a household. “Pay yourself in cash for the month, then say ‘OK, this is the money,'” says Godfrey. “‘It looks like a lot, but here’s the tax bracket we’re in, so count out money for the tax man. Then there’s gas, utilities, mortgage, car, etc.’ It goes quickly.”

Once your children understand the money that goes into running a household, incorporate them into the savings process by encouraging them to help reduce household spending. Godfrey says she shows her children the household electric bill, then brainstorms with them on ways to reduce electrical use. If the next month’s bill is lower, Godfrey gives her children a portion of the difference in cash.

Share the secrets of saving

“The major thing we can teach our children is saving,” says Geoff Wilson, vice president of volunteer initiatives for the nonprofit financial literacy organization, Junior Achievement Worldwide.

Personal savings are the key to college, retirement, homeownership and anything else in your financial future. Personal savings rates in the United States, however, have declined significantly in the past 20 years, according to data collected by the Federal Reserve System.

Godfrey chalks at least part of the savings problem up to a lack of awareness. “The only thing kids see us do with money is spend it,” she says. “They don’t see us save, they don’t see us give to charity, they don’t see us pay bills, so it’s essential to involve them in the rest of the process.”

One way to do that, Wilson says, is to show them your own savings vehicles and explain how money grows when it’s invested. To bring those figures into perspective, have your child pick out an item he or she wants, such as a toy, day trip or amusement park pass, and discuss how much of his allowance he’ll have to invest and over what time period to be able to afford it.

For older children, use that same process to calculate how much the family will need to save for a college education. Bankrate’s savings goal calculator can help you demonstrate.

“Kids love to see their money grow,” says Wilson. As an example, if a 15-year-old began investing a dollar a day until she reaches age 65, she will have amassed over a half-million dollars, assuming a 10 percent average annual interest rate.

Instill smart spending habits

After learning to pay themselves via savings, kids need to learn how to pay others.

Fitzgibbon says that the easiest way to drive spending and budgeting lessons home is to let children earn some cash, then guide them in their purchasing decisions. “Handing kids an allowance and then not helping them decide where that money should go isn’t cutting it,” Fitzgibbon says. “Parents need to show why they make the purchasing decisions they do.”

Perhaps the reason most parents don’t discuss their spending choices with their children is because they’re not making the right ones themselves. A survey by the AllianceBernstein investment firm found that more than half of all parents spent more on dining out in the past year than they did on saving for college; 49 percent blew more dough on vacations.

But poor spending decisions also can be effective financial lessons, says Ameriprise Financial private wealth adviser Renee Hanson. She advocates that parents openly discuss financial woes (in general terms if it’s a sensitive subject) and allow their children to make a few poor choices of their own.

“Kids need to make poor purchasing decisions early on to understand how to avoid making big mistakes later,” Hanson says. “Parents can also discuss regret. Tell your kids, ‘This is the decision I made and this is the cost of that decision,’ so that your child can make a different decision in the future.”

Hanson believes that allowing children to make a few poor purchasing decisions also helps them understand the value of their money and the things it can buy.

“My daughter bought a pair of Nike shoes for $94, which I thought was outrageous,” Hanson says. “The back of the shoes rubbed down pretty quickly and she was furious. She wrote to the company and they replaced them. If I had bought them, she never would have done that.”

Keep out of credit quicksand

Want to keep your kids out of debt? Teach them about the cost of credit long before they’re old enough to carry plastic, says Hanson.

Credit card debt of high school and college students continues to grow; the average college senior has more than $2,800 in credit card debt, according to Nellie Mae, a student loan company that is a subsidiary of the SLM Corp., popularly known as Sallie Mae. To stem that debt tide, parents need to reach their kids before credit card companies do.

“It is not uncommon for a child who has $10 to choose a $15 item to buy and ask mom and dad for the (extra) money,” Hanson says. “But it’s important for parents to say ‘OK, I will loan it to you and you will pay me back over these amount of months and with this amount of interest.'”

One risk-free way to teach your children about plastic is to hand them a prepaid card when they are as young as age 10. Godfrey says that the card helps kids equate purchases made with plastic to money being subtracted from their account, but without the risk of high-interest debt.

“If you hand them their own credit card, it’s like handing them the keys to a car and saying ‘Figure it out while you’re driving,'” says Godfrey. “I let them have a cash card and a finite amount of money. When it’s gone, it’s gone.”

Godfrey also advocates openly discussing the family’s credit status with older children.

“A lot of parents will say ‘I’ve messed up my credit! How can I possibly talk to my kids?’ but that’s the whole point,” Godfrey says. “With our kids we get to do it over.”

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