smart spending

4 fiscal lessons you need to teach your kids

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.

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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.

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