Teach your kids good financial habits

Given the current state of financial markets and the economy, many parents will soon need to explain to their kids why they can no longer afford to buy expensive videogame systems or send them to trendy summer camps next year.

Eric Tyson, author of Let's Get Real About Money! Profit from the Habits of the Best Personal Finance Managers (FT Press), says now is the perfect time to teach your kids valuable lessons about money.

Tyson argues that parents need to get tough with their kids--and that doing so will help them become more financially responsible in the future. The following excerpt and nine essential lessons for kids about money come from Tyson's new book.

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If you don't teach your kids about money realities and issues, you're setting them up for unnecessary and easily avoidable problems when they go out into the real world.

One of the great challenges in raising kids among our country's relative economic abundance is fulfilling the natural parental desire to provide children with opportunities for personal growth and development without spoiling them into dependency.

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Regularly overindulging kids can result in long-term damage to their well-being, but you surely don't want to deprive them either. Suppose your daughter seems to have a talent and passion for music. Should you not enroll her in music classes or get her private lessons outside of school simply because doing so may seem extravagant--especially if you didn't grow up with such opportunities? And, where do you draw the line with such expenditures, especially when money is tight or you and your spouse have different philosophies and beliefs about such spending?

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Of course, you should provide for your kids. The great danger, especially in more affluent families or in less affluent families willing to spend beyond their means, is engaging in continuous and excessive spending on our kids with the implicit belief that more is better. Being a good parent requires some hard work. Although saying "yes" is more fun and makes you more popular, especially in the short term, psychologists universally agree on the importance of setting limits and saying "no."

Explaining and enforcing limits creates feelings of security for children and actually demonstrates to them that you care. And, it teaches them that, indeed, money doesn't grow on trees or come in unlimited supplies from credit cards. Kids benefit immensely from learning to work for things--saving, making choices, sacrificing, and contributing to their families and households through chores.

According to a survey conducted by the National Bureau for Economic Research, children who get personal-finance education in high school save 5% more of their incomes than kids who aren't exposed to such education. Five percent may not sound like a lot, but, when you consider that most adults should be saving about 10% annually to accomplish their financial goals and actually save less, saving 5% more is a huge difference.

While high school is a terrific time to teach kids key personal financial concepts before they're nudged out of the family next, you can and should begin to teach kids about money much sooner. The elementary school years, when kids are learning math concepts and getting comfortable with numbers, are an excellent time to lay a solid knowledge base.

Excerpted from "Let's Get Real About Money! Profit from the Habits of the Best Personal Finance Managers " written by Eric Tyson, FT Press.