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Investor Psychology

What to Tell the Kids

Trying to hide financial worries can create more anxiety in your kids.

A few weeks ago, I called my son, the college sophomore, and asked whether the financial crisis was topic A in his economics class. "Not really," said Peter. "We have a test coming up, so we're covering the material."

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Much as I admire the diligence of Peter's professor (especially because I'm paying the tuition), it seems to me that he was passing up a prime opportunity to discuss how we got into this mess. And in econ class, kids could debate the trade-off between recession and inflation (look what's happened to the price of gas). In high school history classes, they could be discussing how Ben Bernanke & Co. have been greasing the skids with credit in order to avoid the mistakes of the Great Depression, when government sucked money out of the system.

Middle school teachers, too, could inject a little financial literacy into social studies by pointing out that many consumers got in over their heads by borrowing easy money to buy houses they couldn't afford. And in math, students could use a compounding calculator to learn how it pays for young people, with decades to go before retirement, to buy stocks at today's fire-sale prices.

For younger children, the lessons are a bit trickier. Should parents discuss the financial crisis with their kids? And if so, what should you tell them? The answer to the first question is a qualified yes. As for the second, it all depends on the child's age. What younger kids crave most is reassurance that all's right with their world. Parents need to stay calm. Never let them see you sweat.

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And remember that children take their cues from you. Even if you don't talk to them about what's going on, they can sense that something is up. Ignore the situation and you risk having them imagine that things are worse than they are.

Also keep in mind that youngsters take you literally, so don't resort to figures of speech or dark humor about going broke or ending up in the poorhouse. They may not know what a poorhouse is, but they may start to worry that the family could wind up camped in a box in the street.

And turn off the TV and tune out the talking heads. A 24/7 stream of hyped-up headlines and downbeat news will make all of you crazy.

Keep it simple. A little honesty goes a long way. Younger children don't want or need to know your balance sheet. You can share more details with teenagers, but don't burden children with information they can't process or problems they can't handle. You could, for example, explain that the money in your bank account is safe because it's insured by the government. Or give your children a simple lesson in how banks work.

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One of my friends explained to her 10-year-old daughter that when you make a deposit, it doesn't just sit on a shelf; the bank lends it out to other people. If the flow of money stops, people can't run their businesses or make purchases.

If you're worried about losing your job -- or your house -- it pays to have a plan. Then you can tell the kids how you'll go about looking for a new job (and give them a mini lesson on the labor market). Meanwhile, let them know that you'll be able to collect unemployment benefits, or that you'll supplement the family income with part-time work.

If you lose your home to foreclosure, moving to a smaller house or apartment that's more affordable may actually ease the financial tension in your household.

Encourage the kids to pitch in. Let them know upfront if their holiday wish lists will have to be shorter this year, or if they'll have to cover more of their own expenses. Most children will be happy to do their bit for the family. In fact, this may be your chance to think creatively about cutting back on holiday overload -- something that might be desirable even without a fiscal crisis.

MORE ADVICE: See Our Raising Money Smart Kids Center