In a tough economy, talking about money and investing can be more important than a primer on the birds and the bees. Here are some simple lessons you should be sharing with your children.
Aside from the usual worries about massive layoffs, foreclosures, and a tumbling stock market, what appears to be a looming recession is presenting another kind of personal dilemma: How much should we tell our children about the gloom and doom, and how can we best prepare them to face the economic monster in the closet when they grow up?
Explaining your family's financial situation and giving your kids responsibility early on can help promote confidence and an ingrained understanding of the money cycle. And don't be afraid to encourage creativity: Developing entrepreneurial traits often begins with inspiration at home.
Given all the grim economic news lately, it is perhaps ironic that April marks National Financial Literacy Month. In that spirit, below you will find six tips for guiding your offspring through a recession.
Have the money talk. Signs of an economic downturn may be an adult worry, but it doesn't mean that your kids should be left out of the picture when it comes to talking about finances. While the discussion may vary depending on the age of your children, the topic isn't any less important for the elementary school set.
"Parents generally don't want to bother their kids with their whole money situation," says Elisabeth Donati, founder and executive director of Creative Wealth International, a Santa Barbara, Calif.-based organization that runs camps and programs to teach kids (and their parents) about money. "Then parents wonder why when their kids leave the house and they hand them a checkbook that they don't know what to do with it."
From the time they start elementary school, show your kids your pay stubs and bills to help them conceptualize where money comes from and how it is spent, Donati suggests. You can even have them watch when you write checks and pay bills online.
If you have teenage kids, chances are they're hearing the word "recession" a lot lately, but might not know exactly what it means. "Start by explaining to [your teens] why the economy is in this position," says Gabe Graumann, an entrepreneur and author of "Money Talk with Gabe," a financial coaching blog. "A lot of teens don't understand how credit works," he adds, but you can "educate them that when you borrow money there's interest that you pay to someone else, that's a risk you're taking and there is liability attached."
Lead by example. Involving kids in daily finances can help them gain an intuitive sense of basic economics -- not to mention make your own daily routines with bills and balances more appealing. If rising costs during a recession prompt you to clip out coupons for the grocery store and make creative use of cheaper ingredients, you might want to use the opportunity to demonstrate budgeting to your children.
Karen Hoxmeier, founder of mybargainbuddy.com, a discount tracker service, says that her three kids get a kick out of comparing prices on cereal boxes and finding good deals on produce. "They look at it like a scavenger hunt, and they compete with each other," she says.
Dan Henderson, founder and CEO of Summit, a Trussville, Ala.-based toy company, and a father of two daughters ages 18 and 21, says that when his children were growing up, he sent them allowances in check form and allotted himself checks for spending and family entertainment as well. The habit, he says, helped his daughters understand cost and limits.
Instead of agonizing over the bank account after the kids are asleep, parents should allow them to throw in their own votes on what luxuries the family could do without. "Let's say you want to take a family vacation to Disneyland," says Jim Del Favero, group product manager for Quicken personal finance software. "Tell your kids that in order to go on a vacation, you need to save up. Ask them, 'What can we do as a family in the next three months to save up?' Give them a goal and help them participate in saving for that goal."
Encourage entrepreneurship. Another way that children learn about money is by watching how their parents work and seeing what it takes to generate an income. Business owners can offer their kids firsthand knowledge and advice on how to start a small business and maybe even generate some of their own income.
On the most basic level, running a lemonade stand or selling baked goods in the neighborhood are popular and fun ways for kids to start thinking like entrepreneurs. And the opportunities for entrepreneurship are only limited by their imaginations. "You can challenge your kids to find other ways to make money," Del Favero says. "If you have a child who likes playing a musical instrument, maybe they can tutor other children. Train children to take the things that they are good at or like doing and see if they can find a way to generate revenue from it."
Seeing an idea through from start to finish is not only an excellent learning experience for children, but it also helps them get in the habit of thinking creatively and being innovative -- both useful skills to have in times of economic depression. "Some of the best and most profitable times for entrepreneurial businesses is when the economy is in a slump," Graumann says. "That's when the market is looking for new ideas and when you have an opportunity to create a new niche in an established industry."
Don't be afraid to share your struggles. Every career has trying moments. So rather than just sharing news of signing a big client or other successes, make a point to explain the whole process to your kids. Trust and openness can translate into entrepreneurial inspiration and financial confidence.
Henderson says that he regrets not being more direct with his children during the financially difficult early years of his business. "We did a lot of things to shield my kids from that, and in retrospect, I really believe that that was a mistake," he says. "Kids don't need the worry of the world on them, but they also need to know that there are exterior things that happen to you that you have to deal with."
As his children got older and company profits picked up (Summit was named an Inc. 500 company in 2003), Henderson realized his mistake. Direct involvement became important, he says. His two daughters have earned extra money by helping clean Summit's offices and warehouses and doing other office tasks. "I'm so encouraged when I see my own kids and how well they handle difficult situations because of that," he says.
Many company founders say that having entrepreneurial parents of their own provided plenty of inspiration for them -- which they, in turn, want to pass along to their own kids. Peanut Butter & Co. founder Lee Zalben says he remembers hearing stories about his grandmother's catering firm and how his parents worked the bar and the coat check to help her out. "I came from a middle-class background and certainly wasn't born with a silver spoon in my mouth," he says. "I was always taught the importance of bootstrapping and how it's really all about hard work."
Look beyond allowances. Besides handing your teens a weekly or a monthly allowance, encourage them to generate their own earnings. Many successful entrepreneurs got their start at ice cream shops, movie theaters, and local stores -- and credit much of their early confidence, self-reliance, and teamwork skills to their first experiences as employees.
"If times are tough, and mom and dad don't have as much money to spend on their kids, maybe that's a great time to encourage them to get a job at a local restaurant, a movie theater, a craft store, hopefully something that their child has some kind of interest in," says Zalben, who says he worked a slew of jobs for pocket money starting at age 12.
"I knew a lot of kids whose parents wouldn't let them work because they wanted them to focus more on their studies," Zalben adds. "But I don't think any of those kids spent any more time studying than I did. I just had to have better time management."
If adding to your child's already-arduous academic load is a serious concern, seasonal jobs during school holidays can train kids to spread out a larger chunk of money across a full calendar year. Once a teenager enters college, he or she can be responsible for budgeting money for day-to day expenses. Henderson says that he agrees to match any amount of money that his daughters save from part-time jobs and thus double their budget for college spending money. He cut his daughters a similar deal when they were saving up to buy their first cars.
Practice smart saving. There is no better time to teach the importance of smart saving than during a recession. Starting at a young age, kids should get used to the idea of allocating money for spending, saving, and sharing.
Graumann uses the envelope system with his young kids at home. "Whether it's grandma giving them $20 on their birthday, or it's money they made selling lemonade, have kids put a percentage of that money in each of the envelopes," he says. "Then, when it comes time to go to the store and your child wants to buy something that's not on the grocery list, they can take their envelope for 'spending' with them." Not only does this method help Graumann control the amount that his kids can spend, but he says it also teaches them the value of holding on to some of their money, rather than spending it on a toy they will probably forget about in a few months.
"The hardest thing for kids to learn is the amount of time it really takes to save money," says Del Favero, noting that it's something he didn't learn for himself until he entered the workforce. However, the earlier you can communicate to your kids the difficulty of saving long term, says Del Favero, the more likely they are to have success with saving in their future.
It's also important to get your kids involved in saving for their own future. Sit down with your teenagers and devise a plan to save for their college fund; this will give them a sense of ownership for the family financials. In the end, though, saving money shouldn't only be for selfish reasons. Make sure your kids are also setting aside money that they want to share. "It teaches them the importance of giving back to the community," Del Favero says.