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Bad Financial News: How to Tell Your Kids

An economic downturn always claims more victims than statistics reflect, and the current recession is no exception. Unemployment is at a 26-year high, foreclosures are at record levels, and about 5,000 families and businesses are going bankrupt every day. And behind every stat, there are people — often parents, who are overwhelmed, worried, and unsure how to spin the new developments when talking to their kids.

One mom blogs about her preschool daughter’s reaction to her husband’s job loss: “‘Will you sell my treehouse? Because I like my treehouse, and I don’t want you to sell it.’ My heart breaks, because I don’t want her to worry. I don’t know how to talk about this without causing her to worry. I am ashamed that we have to worry. I am ashamed that I don’t know how to handle this.”

Most of us facing similar situations are in the same boat — there’s no “what to expect” handbook for this aspect of parenting. The key, says Ken Robinson, a Cleveland financial planner, is to tailor communication to your kids’ age — even grown kids can be shaken by their parents’ financial woes — and to make sure smaller kids understand that tough times come and go, but family bonds are forever.

Here’s an age-specific guide to sharing the news the best way possible:

Preschool and Elementary School: Keep It Simple

With young kids, it’s tempting to hide bad news: You spend your life trying to protect them. But in the case of job loss, experts warn against it. “If there’s a feeling of it in the air, they will sense it,” says Carolyn Meyer-Wartels, a psychotherapist and parenting educator in New York. “Overhearing the news, or hearing about it secondhand, is far more anxiety-producing than actually getting the truth.”

Though kids start becoming curious about money as early as age 5, their understanding of the bigger picture is, of course, limited. (When my 5-year-old heard that someone had lost a job, he asked, “Can we help him find it?”) And their experience of our job loss is completely different from ours. For them it can mean mom or dad will be spending more time at home. You can’t completely hide your own feelings, because kids can see through that. But you can reassure them that even though part of your life has changed, they’ll still have all the things they need — food, home, family — and that you’ll still take care of them, bring them to school, help with homework, make dinner, and put them to bed.

Sometimes, though, it can be more complicated. Although it seems irrational to adults, kids often feel like they’ve somehow caused an event like a divorce or layoff. So you might find yourself explaining to your child that your problem is not his or her fault. “Children really view the world with themselves at the center,” says Tovah Klein, director of the Barnard Center for Toddler Development. “It’s important to free them up from any feelings of guilt or responsibility.”

Whatever you do, protect your kids from any unsettling show of your own stress. Even if you think you’re using code on the phone with a friend, there’s a good chance your child is feeling your anxiety. So save those conversations for after bedtime.

At this age, children adapt to new circumstances (and forget the old ones) very quickly, so a typical 5-year-old should adjust fairly quickly to a change in his or her standard of living. This is Piaget’s “intuitive phase” when things are still fairly fluid — whew! In fact, many psychologists encourage parents to use a financial setback as a “teachable moment” in how to handle money: coupons, price comparisons, the products on the eye-level supermarket shelf versus those on the bottom shelf. Thinking about money is OK (though crying about it in front of your kindergartener is probably not).

You don’t have to make “faux” cutbacks to teach kids about your new financial circumstances, like reducing tiny allowances that make no difference to your bottom line. That said, experts do point out that families often bond in a wonderful way if everyone feels as though he or she is helping out. One blog recently talked about how a dad told his kids that $10 face painting was no longer an option in the park, but they could still do all the free activities. Kids can “get it” on their own level. Small sacrifices are not the end of the world but will help your children get their own handle on what’s happening. And if larger sacrifices are required — the usual day camp in the summer has to be swapped for the inexpensive town camp, for example, or an annual vacation is canceled — they’ll be somewhat prepared.

“Think like a kid,” says Patricia Seaman, who handles outreach for the National Endowment for Financial Education. “The parent may view this as some really sad news, but the kid may be perfectly happy with a low-cost alternative.”

Tweens: Remember Peer Pressure

Kids who are 9 to 12 are plenty aware of what’s going on in the economy, so if your household has to tighten its belt, they may not be surprised. “They’re getting bombarded with these messages of high bankruptcy rates, high foreclosures, and business failures,” says Leslie Linfield, director of the Maine-based nonprofit Institute for Financial Literacy. “Every trip they take to the mall, they see another store gone.”

At this age, kids understand that not all families have the same financial circumstances. They compare their toys and clothes with those of friends, and peer pressure starts taking hold. If your financial straits have temporarily deprived your kids of things they love, like video games or cool sneakers, you can acknowledge their disappointment, but don’t overdo it by fretting constantly, says Jill Norvilitis, a psychology professor at Buffalo State College who specializes in children’s emotional development and the psychology of debt. “If anything, the parents worry more about this stuff than the kids,” she explains. “The surefire way to get them to worry is to start talking about how you wish you could do such and such a thing for them.” Their awareness of the recession — and the fact that some of their friends’ parents may have lost jobs — can make the loss a bit easier to accept. When you’re 12, you don’t want to be different. So it might help to talk to your kids about people you all know who are in the same boat.

You can level with kids this age: You’re sorry that you can’t buy more, but times are tough all over. You’ll make sure they still have all the necessities, but spending on things like clothes and summer camp is going to change. Then solicit suggestions on how the family can rearrange its budget to find room for a few things your 11-year-old really doesn’t think she can live without. Whether it’s cutting sleepaway camp from eight weeks to four or finding a way for the family to live with just one car when you’re used to two, you can be up front about costs and adjustments.

Rather than leave it at that, you can teach a lesson through these hard times. You might want to explain that you’re making a conscious choice to be true to the family’s financial values and that, for example, you don’t believe in going into debt to take a trip — that you’d rather save up for that trip and enjoy it when you can afford it.

If your tweens still seem especially disgruntled or disturbed, consider holding a family meeting to discuss the options and realities and to get feelings out on the table. Or speak one-on-one with your kid — you know which situation is more appropriate for your own child — and let him or her get it all out, with no judgment.

Teens: Sharing the Load

Teenagers can be the most challenging for parents wrestling with a hard new economic reality, but they can also be part of the solution, says University of Washington finance professor Lewis Mandell. On one hand, teens are keenly aware of what’s happening in the world around them today and how a lost job will cut into their ability to afford a new computer, a school trip, or the college of their choice. On the other, teens traditionally have a lot more options when it comes to earning income to support their lifestyles or, in especially serious circumstances, the family.

If your teen can get a job this summer to pay for incidentals, it can take a lot of pressure off the situation. But with teen joblessness at its highest level since World War II — a full 70 percent of teens will not have a job this summer, according to Andrew Sum, director of the Center for Labor Market Studies at Northeastern University — this may not be an option. You might also consider hiring your teen as your “summer help” — all-purpose babysitter (for younger siblings), lawn mower, errand runner — at a fixed hourly rate half a day every day. If you’re already spending the money on these services, it might make sense to bring that cash back into the “local” economy.

If your teen is asking questions, put together a clear write-up of your family finances so that he or she can see the big picture, including how much discretionary money is available. Keeping up and fitting in are, of course, strong themes of adolescence. Taking the bus to school instead of driving a car can be tough, but because many other families are also changing their spending habits, your teen probably won’t feel like a complete outcast.

Of course, the glass-half-full view is that this is a chance for teens to learn about earning, saving, and making the most of the money they do have. Shopping doesn’t have to be about the mall. There are consignment and vintage stores, discount sites on the Web, tag sales, and flea markets.

None of these smaller adjustments will prepare you or your child for the elephant in the room, though: college costs. As every teen who follows the plot twists on Gossip Girl can tell you, college is one area where even families who are otherwise still in great financial shape are having to adjust their expectations. “If suddenly your 529 college savings plan balance is two-thirds of what it was, you may be looking at your fourth or fifth choice instead of No. 1 or No. 2,” says Julia Heath, chair of the University of Memphis economics department.

If you’re worried about paying the costs of school for your high-school senior, fill out the FAFSA form (www.fafsa.ed.gov) even if you think you won’t qualify for aid — FAFSA lets you take out federal loans to pay for school, which have much lower interest rates than private bank loans (to be avoided if possible). After your child exhausts his or her Stafford loan quota, the next best thing is federal PLUS loans.

But you don’t have to wait until senior year (or till official financial disaster strikes) to have a frank discussion about tuition and fees and what your family can afford. Some state universities can provide a great education at a fraction of the cost of a private college; once your teen is aware of the economic realities, he or she can take an informed approach. Consider setting a “tuition cap” with your child, suggests Jennifer Thomas, a psychologist and co-author of The Five Languages of Apology. “You can still say, ‘I’ll send you anywhere you can get in,’ but make clear how much you can contribute.” Then the process becomes something your child can participate in and potentially push forward (through loans, aid, part-time work, or a plan to start in one school and transfer to another) rather than a disappointing fait accompli.

Young Adults: Rolling with the Punches and Stepping Up for Mom and Dad

You’re going to be a financial role model for your kids long after they turn 18. According to a recent Charles Schwab survey, 43 percent of all Americans ages 23 to 28 still seek financial guidance from their parents — more than all other family members and mass media channels put together. And because your kids look up to you, it’s never easy to tell them your retirement plans or any other aspect of your financial life is in trouble. (Even retirees who took a seemingly conservative approach by investing in supposedly safe lifecycle mutual funds saw their nest eggs shrink nearly 20 percent last year.)

These situations can be especially trying for grown children who see the tables turned: those who perhaps expected to inherit money one day but who are now finding they need to chip in to keep their parents afloat. And with a record percentage of people ages 25 to 34 living at home with their parents — the most since the Census Bureau starting tracking this statistic in 1960 — grown children are looking for more than wisdom; many are looking for a meal ticket.

When you’ve gotten laid off yourself, having a twentysomething “boomerang” kid in the house can actually be a bonus, says Seaman of NEFE. “If you really need to conserve money, your child can contribute to the household income,” she says. For example, charging rent is a very good idea, and it’s perfectly acceptable to have your new “tenant” chip in on the grocery and utility bills, too. (Of course, sooner or later you want your kids to get their own place, so make sure they can save toward that goal as well.)

This is an opportunity to review any financial support you’re providing your kids, whether they’ve moved out or not. One out of every three twentysomethings Schwab polled still gets “a little” help with the bills from his parents.

“It’s wonderful for the parents to be able to help the children when they have real economic hardship, but often these older kids have a sense of entitlement that doesn’t stop,” says financial planner Denise Smith. “What I tell my clients in this situation is to tell the kids that you’re sorry you can’t help them more, but you have a limited amount of money and need to focus on your own financial needs.” And, of course, you may be the one in need of help, in which case you should sit down with your kids and have a very honest conversation about the state of your own finances and what they might be able and willing to do to make things a bit easier.

It’s true that financial stress affects kids — as with any kind of shake-up, they feel it no matter how much we try to shelter them. But if parents can continue to provide a stable, loving environment — even if it’s a radically scaled-down version of the old environment — and are able to keep the lines of communication open, kids will probably be just fine. In fact, they can emerge from this tough economic period as we hope we all will — stronger and wiser, with well-thought-out priorities and healthy habits that lead to smart, sustainable financial lives.

Beth Kobliner is the author of the newly released Get a Financial Life: Personal Finance in Your Twenties and Thirties.