Twenty percent of young adults in the U.S. aged 18 to 24 have debt in collections, according to a 2022 Urban Institute report, "What Can Policymakers Do to Help Young Adults Cope with Debt?” Debt at this stage of young adults' lives can be especially difficult to manage, not only because of their lack of experience but also due to limited incomes and higher interest rates. 

Therefore, educating kids on how to use credit cards responsibly is crucial to their future financial well-being. The good news is that those who learn and develop good saving habits early in life are more prepared to deal with what lies ahead.

The younger set

Begin teaching your child the concept of money, including the values of coins, starting at the ages of 4 to 6. During this time, keep it simple. Allow your child to earn money to save in a piggy bank for small chores.

It’s all elementary

By the time your child is 7, an allowance is essential to learning about money and developing good habits. Familiarize your kids with banking. Open a savings account, so they can watch their money grow. Also, help them set achievable goals, such as saving for a new toy or putting money away for holiday gifts.

Keep in mind, however, that many banks charge service fees unless a minimum balance is kept, and frequent trips to the bank may be impossible. As an alternative, set up your own “family bank.” Give your child a spare checkbook ledger or savings passbook. Then copy blank savings deposit and withdrawal slips from your bank for your kids to use. Require them to fill out the slips and log transactions in the ledger. Also, give your kids monthly interest for their savings so they can experience the immediate reward of saving money.

The teen scene

Designer clothing, entertainment and car expenses are the most significant areas of teen spending. Some teens also put away money for college. But few are prepared for the adult world, says developmental psychologist Nancy J. Cobb in “Adolescence: Continuity, Change, and Diversity.” That's because most teens aren't primed for the responsibility of paying for food, housing and health care costs.

Teens who are involved with the family budget and contribute to family expenses learn a valuable lesson. Showing teens the spending categories in which they have a direct impact on family expenses is helpful. Also, agree on a reasonable amount which your teens can contribute to help cover those expenses. It will go a long way toward preparing adolescents for adulthood.

Whether teens contribute or not, their working hours should be limited to no more than 10 to 15 per week. According to Cobb, researchers have found adolescents who work, especially 20 or more hours per week, are not as engaged in school as their nonworking peers. Based on various studies, this shortchanges students in the long term. If you restrict your teens' working hours to ensure success in school, it's good to provide an increased allowance for clothing and personal needs. You can then help your teens budget their money.

Still, there are many ways teens can learn the value of money and develop good habits. In fact, limiting teens' funds may force them to be more selective and make wiser financial decisions.

Tips your kids can bank on

Help your child develop good saving and spending habits in the following ways.

• Allow your kids to make some of their own spending decisions. Set reasonable limits, then offer appropriate guidance while giving them opportunities to learn from their mistakes.
• Don't loan your kids money every time they want it. But do offer occasional opportunities for them to learn the costs of borrowing and experience repaying a loan. When contemplating whether to give your child a loan and how much, consider the purpose of the loan and their ability to repay the loan within a reasonable time. Also, how have they handled repayment in the past?
• Be sure to charge interest on loans, so kids learn the cost of borrowing. Realize that, regardless of how financially savvy we raise our kids to be, borrowing does have its place. At the very least, it's often necessary or practical for acquiring a college education, reliable transportation and a home. These can be wise investments, even when borrowing is needed.
• Teach your child how to set financial goals. By the teen years, these may include those big-ticket items just mentioned. And don't overlook the importance of short-term goals, which offer your kids a feeling of accomplishment and a boost in self-esteem.
• Require your child to put at least 10% of each paycheck, or allowance, into savings. It'll be much easier to adhere to as an adult if practiced during childhood and teen years.
• Don't be completely secretive about family finances. Kids have few opportunities to see and experience the financial side of the adult world. This doesn't mean you need, or even should, disclose everything. But it's easier for kids to understand money management if they can see it in concrete terms. Develop a detailed household budget. Then explain it so your adolescent can see how your family spends and why.
• Discuss the ways in which you save and invest your own money. Explain how these different plans work and point out both the benefits and the risks.
• Have your kids visit www.themint.org. They'll learn about money, goal setting, saving, investing and more.
• Try a computer program such as Family Bank by ParentWare to help your kids track their allowances, expenses, loans and more. Family Bank calculates interest for both savings and loans, allows kids to write checks to their parents and creates graphs of their spending habits. Visit download.cnet.com/Family-Bank/3000-2132_4-10077035.html.