If you think the current market volatility is frustrating, just try explaining it to your kids.
When the markets dominate headlines, the evening news, and small talk among adults, there's little chance the kids will miss what's happening. That's not the same as them understanding it, though, and explaining the market's dips and dives is no easy feat (not to mention the debt downgrade) -- especially for parents who may themselves be confused and uneasy. But it is important, experts say. After all, some 42% of Americans says they get most of their financial knowledge from their parents, according to a 2011 National Foundation for Credit Counseling study. And learning how to better handle money and make financial decisions in tough times can ultimately help kids grow up to be savvier, more confident investors and savers, says Peter Zaleski, professor of economics and statistics at Villanova University. "If you have experience with something, the ups and downs don't scare you as much," he says.
That doesn't mean it's easy. More parents are prepared to talk to their kids about drugs or sex than money, according to an April survey from ING Direct. For starters, many are afraid they aren't great financial role models, says Brent Neiser, a certified financial planner and the senior director of strategic programs and alliances for the National Endowment for Financial Education. They may also worry that sharing too much about a rough financial situation will create undue anxiety, or assume that their kids are unaware, he says.
But staying quiet doesn't protect children in quite the way their parents may hope. Kids are likely to pick up on bits of the news from classmates, the news or other sources, and draw their own conclusions. And impressions formed early tend to last. Young adults who were in their early teens when the recession hit in 2008 are now very distrustful of financial institutions, with 75% saying the stock market is "rigged," according to a June survey from the University of Arizona's Take Charge America Institute. That kind of fear without experience could create a generation less willing to invest or save, warned researchers. It already has, in slightly older generations :A new study from Betterment.com found that investors age 35 and younger were 33% more likely than other age groups to shift from stocks into less-risky bonds during market volatility. (Read: How to Teach Kids about Money.)
On top of that, kids figure out more than parents expect, which is why they could be anxious if you won't talk about it. "Parents invariably think their kids don't know much about family finances, whereas the kids tell us about family finances in all kinds of detail -- how much money mom earns per hour, or which bills need to be paid next," says Martha Wadsworth, a professor of psychology at the University of Denver.
But talking to kids about money in general and the market swings in particular doesn't have to be hard, says Mark Zupan, an economist and dean of the Simon School of Business at the University of Rochester. Even elementary-school age children can grasp some of the basic lessons: there are good times and bad, and right now we're in the bad part of that cycle, he says. It's a prime time to talk about the importance of saving over the long term and having a plan for your money. That said, parents should be careful not to get so detailed that their young child starts to fear that Ben Bernanke is the monster hiding under the bed. Emphasize that the forces affecting the economy aren't ones that they can control, and that they shouldn't worry, says Kimberly Foss, a certified financial planner and the founder of Empyrion Wealth Management in Roseville, Calif. "You want to give your kids the facts and the truth, not nightmares," she says.
Tweens and teens will benefit from even more detail, like how a declining market can provide a good opportunity to snatch up stocks at bargain prices, Foss says. They'll also need explicit lessons like how to manage a checking account. Use any investment accounts you have for them as a teaching tool, or better yet, give kids shares as a gift. PBS Kids, the government's Federal Citizen Information Center, 360 Degrees of Financial Literacy and the Jump$tart Coalition have tools and games to use, too.
Parents who have been up-front with their kids about money say the results can be gratifying, if occasionally surreal. Maria Bailey, host of "Mom Talk Radio," was frustrated Wednesday to see Deere & Co. close at $68 a share -- a far cry from the $95 she paid for it back in May. "Don't worry about it," advised her 17-year-old son Owen, who, along with his three siblings, participates in family dinner-table talks about the economy and picks several stocks each year to invest in as a holiday gift. "It's important to stay in the market long term. You're not buying stocks to sell them tomorrow." Says Bailey of the exchange: "It was one of those a-ha moments in my life where I thought, I must be doing something right as a mom."