How to Turn Wall Street's Ups and Downs Into Teachable Moments

Financial headlines, whether written on the frontpage of a newspaper or being discussed on TV, can be scary. S&P Downgrades U.S. Debt Rating and 400-Point Selloff on Wall Street.

Its hard enough for the average adult to grasp the significance of these events, much less put it into perspective. Imagine what goes through a childs mind when they listen to reports on the evening news or overhear others discussing them.

Even at very young ages, kids are observing whats going on and drawing conclusions, says Stuart Ritter, certified financial planner at T. Rowe Price mutual funds and father of three. If parents dont provide information to help kids make sense of what theyre seeing, theyre likely to draw the wrong conclusions.

For example, he cites what happened when a family friend pulled up to her banks drive-through ATM with her 2-year old in the car. As she was entering her information, she heard a small voice from the back seat say, Mommy, I want fries with mine.

Instead of laughing at the child or launching into a lecture on the difference between McDonalds and a bank, Ritter says parents should use these occasions as teachable moments. Thats what he did when his 7-year-old daughter recently announced she would like to have her own credit card. Rather than replying that a minor cannot legally enter into a contract, he simply asked her why she wanted a credit card. Her response was both honest and eye opening: Because when you to the store, if you have a credit card, you can have whatever you want.

From a 7-year-olds perspective, a credit card was a free pass. The key to the candy store. Ritter then explained that mommy and daddy still need to pay for whatever they take home because the next month the credit card company sends them a letter asking for money. His daughter- clearly a budding economist- responded by asking if she could see the bill when it arrived in the mail. (He intends to show it to her.)

Ritter urges parents to talk about money in an age-appropriate way.

Its not about waiting until a child hits age 14 and having this Great Big Talk in your living room. Its about taking advantage of those everyday money moments. This doesnt mean discussing how much mommy and daddy earn, but rather, he says, explaining how finances work from an operational point of view, that is, how money flows.

Its easy to see why ATMs seem magical to kids. (Especially once they grasp that cash is more desirable than French fries.) More than one parent has had to explain how it is that money comes out of a wall. For Ritter, its an opportunity to connect the dots for a child by explaining how the money gets into the machine.

Discussions about money are also a chance to teach a child about values and priorities.  For instance, kids may harbor resentment says Ritter, if they see other families taking two-week vacations and wonder why their family only goes away for one week. Thats when parents need to explain that theyre saving the money in order to pay for the childs college education.

Parents shouldnt wait until a child asks a money-related question, be proactive. When hurricane Irene took out a large tree on the Ritters property and required writing a sizable check to a tree removal firm, he used that as an occasion to explain the concept of an emergency fund. We had to pay money we didnt expect to pay. Thats why mommy and daddy set money aside.

Even less tangible events, such as the historic downgrading of Treasury debt and record-high deficits, can also present teachable moments. Its a chance to explain the importance as a family of living within your budget. He suggests explaining it to a child this way: If you buy things and dont have the money for them, it can affect your ability to do other things you want to do in the future. Thats why we dont borrow money to pay for a vacation. Thats why we drive older cars.

Teaching kids about money and responsible spending habits doesnt have to involve diving into concepts such as supply and demand, inverted yield curves, or currency devaluations. Parents can use current events--both personal and global--to teach children broad concepts about money management.

Just remember: No matter what Ben Bernanke, Congress, or the ECB do, the actions and financial decisions made by mommy and daddy themselves always make the biggest impression. You cant expect a child to walk-the-walk if you dont set an example yourself.

Ms. Buckner is a Retirement and Financial Planning Specialist at Franklin Templeton Investments. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content. 

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