The Best Money Lesson for Kids? Independence.

When parents scale back financial support, they help their children more.

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Shortly after arriving at college, I visited the ATM to withdraw some cash, and discovered that my bank account was empty. In fact, it was overdrawn by about $100. I can vividly recall the panic of that gray afternoon, even thought it happened 10 years ago. That was just the beginning of my financial education: Soon, I would be forced to learn, by trial and error, how to live within my small budget, how to use a credit card (and pay if off), and how to shop around for big purchases.

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Like me, most college students leave home for the first time completely unprepared for the complicated financial decisions soon thrust upon them. On average, high schoolers receive a C-minus grade on an online financial literacy test offered nationwide through the Treasury Department.

Part of the problem is lack of education. Only four states—Missouri, Tennessee, Utah, and Virginia—require students to pass a stand-alone, full semester class in personal finance before high school graduation, according to the Jump$tart Coalition for Personal Financial Literacy. Not surprisingly, students in those states also were among the top performers on Treasury’s financial literacy test.

That kind of textbook financial literacy, which covers how taxes are taken out of paychecks, how interest payments work, and how to budget, is important, because research shows that it impacts how well we manage our money in real life. Annamaria Lusardi, a professor of economics at Dartmouth College, has found that people who can demonstrate that they understand basic financial principles are more likely to accumulate wealth and avoid debt, regardless of income and education levels.

That’s one reason the federal government and nonprofit groups such as Jump$tart have invested so heavily in promoting financial literacy in recent years, spurred on by the financial crisis. President Obama recently appointed bestselling author Beth Kobliner to help improve financial literacy, picking up where the Bush administration, which launched in 2004, left off. This week in Washington, Rand Corporation is hosting the first annual conference on financial literacy, gathering academics, researchers, and federal officials to brainstorm over how to better teach people about money.

The problem with promoting financial literacy, though, is that it’s not clear students always get the message. Lusardi points out that people who take financial education courses don’t always do better; one study that followed up with students five years later found it didn’t have an effect on their actual behavior.

[For more money-saving tips, visit the U.S. News Alpha Consumer blog.]

While personal finance experts continue to search for the best way to impart money lessons, there’s something parents can do today to help prepare their children for financial independence. That is resisting the urge to be overly protective and supportive—something that doesn’t always come naturally to today’s hovering moms and dads.

Lewis Mandell, a finance professor at the University of Washington who has studied financial literacy, says allowing children to experiment and make mistakes can provide more useful lessons than anything taught in school. He encouraged his now-grown daughter to invest as a teenager; she learned how to diversify after losing money in Pepsi stock.

Encouraging more independence can be good for parents, too, who often help their adult children so much that they hurt their own financial security. Most college graduates now say they plan to move back home, at least temporarily. A Pew Research Center study released earlier this year found that 36 percent of Millennials receive money from their parents or other family members. One Ameriprise Financial survey found that almost one in three parents in their 50s and 60s often give so much money to their adult children that it eats into their own retirement savings, but most don’t even realize it.

On average, parents provide much more financial support to their adult children than in the past, with one-third of total expenses hitting after the children are older than 18, according to Stephanie Coontz, director of research for the Council on Contemporary Families. The recession has created even more pressure, as children need more assistance and parents are crunched for cash themselves. “As it gets harder for kids to settle into jobs that pay a family wage, many parents also subsidize by letting them come back home, or by helping with expenses while they try to gain experience in an internship or lower-level job… Parents are facing hard choices that many didn’t think they would have to make,” she says.

Instead of offering rent-free housing along with free meals and cable, parents might want to consider charging a reasonable rate for those perks, or at least come up with a plan for doing so once their children bring home a steady paycheck. At a minimum, parents providing financial support should give a set, predictable amount, instead of paying for expenses directly, so their grown children can get used to living with a budget and handling bills on their own.

As for my own financial literacy, I can’t blame my parents for that day I found myself cashless and overdrawn. In fact, their push for me to be financially independent and have my own bank account, unconnected to their own and funded almost entirely by my own side-jobs, was a big part of my own financial education. That was the last time I ever overdrew my bank account. 

Kimberly Palmer is the author of the new book Generation Earn: The Young Professional’s Guide to Spending, Investing, and Giving Back.