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msnbc.com contributor
updated 10/6/2008 8:37:09 AM ET 2008-10-06T12:37:09

When her husband lost his job as a mortgage underwriter at failed IndyMac Bank this July, one of the hardest moments for Jill Hofknecht was telling her 5-year-old daughter she couldn't have a pet hamster.

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All the accoutrements that the little rodent required — a cage, water bottle, food bowl, toys and food — would have strapped the family's tight budget.

“We’ve discussed it,” says Hofknecht, 32, a New Jersey mom of two. “Emily knows that Daddy is looking for a new place to work — but that until he finds just the right place, we have to save money and be careful about where we spend it.”

As Americans try to navigate the looming financial crisis, or are personally reeling from the downturn, many parents are struggling with how to best address the economic mess with their children.

First of all, experts say, any explanation needs to be done in an age-appropriate way.

“You can’t be telling your 5-year-old the economy is faltering and we might go into the Great Depression,” says Lynnette Khalfani-Cox, “The Money Coach,” a financial expert based in Mountainside, N.J. and co-author of “The Millionaire Kids Club” book series. “But my 8- and 11-year-olds do know the word foreclosure.”

In other words, your preschooler can likely remain happily oblivious, while your interested teen may grill you for hours. So what to do if your child does start asking questions?

“What younger kids are looking for is reassurance,” says Janet Bodnar, deputy editor of Kiplinger’s Personal Finance magazine and author of “Raising Money Smart Kids.” “You may have to address this, if only to reassure them.”

She suggests turning off the 24/7 “talking heads.” “Be aware of the messages they’re getting, and keep them under control. You don’t want to scare the bejeezus out of them.” That also means watching your own fear mongering. “Kids take you literally when you say things like, ‘We’re going to end up in the poor house.’”

Marybeth Hicks, a Washington Times columnist and author of "Bringing Up Geeks: How to Protect Your Kid's Childhood in a Grow-Up-Too-Fast World," believes we don’t do enough to shelter very young kids from harsh realities.

“Parents of very young children — up to age 7 — ought to simply reassure their children that the economy often goes through big changes, and that the family will always work together to take care of everyone’s needs.”

Honesty the best policy?
But many parents say they’d rather be brutally honest, even with younger kids. Michelle Hamilton, 38, a former daytrader in Round Rock, Texas, watches breaking news on TV with her 4- and 6-year-old sons every morning. And last month, the family rented the film “The Grapes of Wrath” as an object lesson in pulling together as a family during tough times. “It’s harsh,” she says, “but in order to teach our kids about survival, they need to know the truth, and that includes a healthy dose of real reality.”

For school-aged children old enough to comprehend, this can be a teachable moment, says Laura Rowley, a Yahoo! Finance columnist and author of "Money and Happiness: A Guide to Living the Good Life.” She and her husband have used the economic woes to reinforce the financial principals they live by.

“I can explain that the economy is upset, but we won’t be affected because of choices we’ve made," says Rowley. "Plus, in reassuring your kids, you get to reassure yourself.”

If you do sit your kids down to talk, experts recommend using a matter-of-fact tone of voice, and reassuring the child that his basic needs will be met. Another option: enlisting a grandparent to talk to your child about growing up during the Great Depression.

“We have talked about our parents’ memories of that experience — many of which are not as bleak as one might imagine,” says James Garringer, 52, a father of three in Muncie, Ind.

Don't just react to the negativity in the news, says Elisabeth Donati, executive director of Creative Wealth International, a Santa Barbara, Calif., non-profit that runs Camp Millionaire, a summer camp for tycoon-minded tykes. She cautions that parents should fully understand the situation first, before unburdening their worries to the children.

“Teach kids that everything in life is cyclical — and that goes for financial markets also,” says Donati.

If you are personally impacted, don’t try to sugarcoat the truth. Khalfani-Cox advises being candid about your family’s shaky finances — especially any mistakes you’ve made. “That’s the best opportunity to share a lesson, and drive home a point that may be theoretical to a child. It’s never too early to emphasize that everything about money boils down to choice."

'Don't lie'
If you or your spouse have lost a job or are at risk of losing your house, “don’t lie,” agrees Lawrence Balter, professor of applied psychology at New York University. “Explain to your kid what the game plan is, so they have a sense it’s not just random and chaotic, that there is something that can be done.”

If you do have to leave your home, explain to your child you will still all be together as a family, and will be moving in with a grandparent or renting an apartment, so they won’t conjure up fears of becoming homeless and alone.

Video: Survey says country seriously stressed out Children will also feel less anxiety if they can take some action. Linsey Knerl, 30, a mother of four in Tekamah, Neb., and a senior writer for WiseBread, a frugal living Web site, advises letting them clip coupons with you or plan inexpensive meals. Tell your kids the upcoming holidays may be tight, and ask them to help prepare a more pared-down wish list. Or help them come up with ways to make some money, perhaps recycling or raking leaves for a neighbor.

Don’t be surprised if they resist making any personal sacrifices. “Kids take things personally, or think it’s unfair,” Balter says. “You might feel they’re being selfish or inconsiderate, but it’s beyond their ability to empathize with your situation.”

One way to ease the pain is show them that you’re cutting back too, says financial planner Rick Kahler, president of Kahler Financial Group in Rapid City, S.D. “It's easier for kids to give up ballet lessons if you've already cancelled your spa membership and cut out your morning visit to the coffee shop.”

However, try to avoid a sense of total deprivation. Distract your children from what they’re missing with new activities. “Brainstorm five fun things your family can do cheaply,” Rowley suggests, such as an at-home movie night with microwave popcorn, football in the park, or a hike in the woods.

Lesson in perspective
Ultimately, the crisis can provide a key lesson in perspective, says Erica J. Sandberg, a San Francisco-based family finance expert and author of “Expecting Money: The Essential Financial Plan for New and Growing Families.”

“This is a great time to talk about what very poor countries are like and that we are nowhere near that,” she says. “Unlike the people of Haiti and sub-Saharan Africa, we have an abundance of fresh food to eat, clean water to drink, jobs to work, and free public schools to attend. This is a refresher on gratitude and appreciation. No matter what happens, our standard of living is really is a dream.”

For now, Jill Hofknecht’s daughter has grudgingly accepted the belt-tightening, while the family survives on its rainy-day savings and income from Twinkling Tees, a line of rhinestone-studded T-shirts. “Parents can use the experience to teach about the value of money — how to make it go farther and how to differentiate between `wants’ and `needs,’” says Hofknecht.

Still, her daughter hasn’t forgotten about that hamster. “She has made it clear that the instant the employment situation is resolved, she expects to be taken to the pet store.”

Melissa Schorr is a Boston-based freelancer who has written for the Wall Street Journal, the Boston Globe Magazine, Reuters Health, Working Mother, Self, GQ and People. She is the author of the young adult novel "Goy Crazy."

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