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Why Making Financial Mistakes Early Isn't Such a Bad Thing

Allowing your kids to make mistakes is hard. But experts say mistakes are great teachers — maybe even better ones than parents.
Students graduating from the School of Law cheer as they receive their degrees during the 364th Commencement Exercises at Harvard University in Cambridge
REUTERS/Brian Snyder

Allowing your kids to make mistakes is hard. As parents, we figure if we've already taken our lumps, why should our kids have to suffer through the same scenarios. But experts say: They do. Mistakes are great teachers — maybe even better ones than parents.

Sophia Bera, founder of Gen Y Planning, says her father told her, “I would rather have you make a $300 mistake when you’re 16 than a $3,000 mistake when you’re in college, or a $30,000 mistake when you’re in your 30s.”

He’s right. When it comes to money, making small mistakes early on can provide a certain amount of insurance against making bigger — more expensive ones — down the road.

So if you’re about to send your kids off to college (even if they're a year or two away) here’s what you need to know about letting them take that financial learning leap.

Should you allow your kids to have a credit card? REUTERS/Jill Kitchener

Overdoing it With Credit Cards

Should you allow your kids to have a credit card? "Allow" might be a bit of an overstatement; eventually they'll be able to do it without you. But before they're 21 or have an income, you can set it up in a way that they can use the cards without hurting their credit. The key: A low credit limit.

Then, check in to make sure they’re paying the cards off in full every month, says Brie Williams, head of practice management at State Street Global Advisors. If they do slip up, sit them down and calculate the cost of the mistake. (You can access a simple credit card debt calculator here.)

One way to almost guarantee the lesson hits home? Make sure your kid is the one paying off the balance. “If you pay it off, you’re teaching them that you’re saving the day,” says Williams. You could also opt for a secured credit card, which requires an upfront deposit that then becomes the credit limit. (After demonstrating a good track record of about 18 months, many will turn into regular credit cards — you can find a list here.)

And finally, if your kid is an authorized user on your card, make sure he or she is paying you back for all purchases — with interest.

Saving for the Future

How do you learn that saving money is worth it — when there are so many things you want everyday? You do it. And then, whether the goal was a vacation, a concert ticket, or a nice fat balance in your account, how do you not learn that lesson? Your parents give you what you want without you having to really work for it. One way to push your kids out of the financial nest is to encourage them to save for their own spring break trips or dorm decor or sorority dues, even if they're only paying portion.

Help them make spending plans, including how much they realistically need to save per month to reach their goals, then go hands-off except for checking in. When the trips roll around, hopefully they’ve stuck to the plans. If not, it’s a learning experience they probably won’t forget anytime soon (especially when saving for their next goal).

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Loans Have to Be Repaid (And Come With Interest)

Okay, so maybe they didn’t make the spring break goal. They either didn’t go, or you (you old softie!) lent them the remaining amount. If the latter happened, make it clear that the money is a loan — with interest. It’s a good way to get your kids ahead of the game when it comes to learning how loans work. “Better they make [a] mistake with you than another lender,” says Bera.

It Helps to Have Skin in the Game

Finally, you've likely heard that the number of years it takes to graduate college has been creeping up. One way to insure that your kids stick to the two-year or four-year or whatever-year plan you've agreed upon, is to ask them to contribute a certain amount toward their own education. If they're taking out loans, sit down and explain how the cost of repayment rises with each year they're in school. And tell them that any scholarships they’re awarded count towards their part of the tuition. (Get ready to see them hunker down with their laptops immediately.)

With Hayden Field