Reality check: 76% of American families live paycheck to paycheck. Only 50% of us have enough savings to cover expenses for three months. 27% have nothing saved. 38% of adults don’t think they’ll have enough saved by the time they reach retirement age. Only 40% are following a budget. Collectively, we owe 11.52 trillion dollars in consumer debt. When it comes to their personal finance knowledge, 40% of adults would give themselves a grade of C, D, or F.

It’s no wonder the stats are so grim. We Americans have not made financial literacy a priority. The latest Council for Economic Education survey shows that only 17 states require any kind of personal finance education for K-12 students. Only 6 of those 17 states hold students accountable (through testing) for retaining what they learned. In other words, the majority of our kids will not learn essential money management skills at school. Therefore, fellow parents, it's up to us to give them a chance at a brighter future. It’s our responsibility to teach our children how to manage their money wisely, and the earlier the better. A 2013 Cambridge University study suggests that our window of opportunity to plant the seeds for financial literacy closes after age 7.

Based on information gleaned from the Cambridge Study and another one conducted recently by the University of Wisconsin-Madison, we can greatly increase the odds of turning out kids who become financially capable adults by helping them develop the following “habits of mind” when they’re young.

Delaying gratification and planning ahead – Fiscally responsible adults understand that good things come to those who wait and know how to make a plan for acquiring those good (i.e., expensive) things. You can lay the foundation for your children to become skilled savers by teaching them how to wait for the things they want and providing experiences in which they can practice planning ahead to reach a variety of goals ranging from planning a play date to saving money for a special toy. Watch for teachable moments in which you can help your child learn to wait graciously. For example, while at the park waiting in line for a turn on the slide you can talk to your child about the necessity of waiting. Provide positive verbal feedback when she does wait patiently to reinforce this important life skill. To help develop the "executive function" of planning ahead you might make a savings chart on which the number of coins (or dollars) needed for a special item is drawn in outline. Your child can color in the coins as he earns them.

Making choices based on the best possible outcomes – Financial literacy is mainly about making smart, informed decisions. Thus, we must provide our kids ample opportunities to practice making choices and living with the consequences of the choices they have made. Financially competent adults understand some choices have irreversible consequences and don’t expect a bailout when they make poor decisions. Giving your children limited choices for the clothes they will wear each day is a simple way to help them practice decision making. You could also give them a small amount of spending money--say, a dollar--when they accompany you to the grocery store and allow them to decide how to spend it.

Understanding that money is limited (therefore, we must spend within our means) – These are the key concepts that will compel our children to establish and follow a budget when they reach adulthood. The grocery store activity above can provide teachable moments to this effect. With an amount as small as $1 to spend children will gain hands-on experience in spending within their means. They’ll quickly learn that they cannot buy a 6-pack of Matchbox cars and will have to settle for a single car or small treat instead.

Understanding that money is earned through work -This one probably requires no explanation, as it's pretty much a no-brainer. Basically, people with a strong work ethic are more likely to succeed financially. Those who are routinely handed things and never expected to earn their own money, not so much. Encourage your child to come up with ways to earn the extra money it takes to get that 6-pack of cars or some other item out of their price range. Later, when they have worked long and hard enough to buy their own real car, they'll be glad you did.

Of course, all of the above is only the tip of the iceberg. Throughout your many years of parenting you will need to educate your children on a lot more concepts to help them become wise money managers. Instilling these four common sense life lessons in your children while they're young will greatly increase the odds that they'll take to those later financial literacy lessons like ducks to water.



Sources: Council for Economic Education, dailyworth.com, genprosper.com, Gen Y Planning, Investopedia, LaFollette School of Public Affairs, the Money Advice Service, moneyasyougrow.com, parentfurther.com