One Sunday morning not too long ago, my husband and I were debating the merits of refinancing our house. Would it be worthwhile in the long run?
Our daughter, an extremely curious 6-year-old, was sitting at the kitchen table coloring and, apparently, listening to us. She put her crayon down, tilted her head to one side and asked, “Mommy, what’s a mortgage?”
What ensued was a 45-minute conversation during which we both attempted to explain the entire banking system. Unfortunately, despite our best efforts, I’m pretty sure our daughter now thinks that all of our money, and our house, belongs to someone else. Which it kind of does.
And, as you probably know, kids ask all kinds of money questions that give their parents pause.
For advice on some of the harder ones, I asked Melissa Joy, CFS, director of investments and client service at the Center for Financial Planning; and Scott Stratton, financial advisor with GS Wealth Management, for some ideas on how to answer them.
How much money do you make?
What your kid is wondering: At a certain point, kids realize that not every family is in the same boat financially. This question shows that your kid is wondering where on the spectrum your family falls. This might be a great entry point to discuss the relationship between work and pay, especially for a younger child: You get paid for going to work, but different jobs make different amounts.
Try not to get caught up in the numbers. If you feel comfortable, there's nothing wrong with telling your kid how much you actually make (just keep in mind that young kids might be more apt to share this information with the neighbors, their teachers or anyone else who will listen).
What to say: “People have different kinds of jobs, and they get paid differently depending on the type of work they do. The money that I get paid from my job allows us to buy the things we need.”
Why can't I have that?
What your kid is wondering: Money can be an abstract concept to children. Especially if you always pay for purchases with a debit card and your paycheck is deposited directly into your bank account, kids may believe that there is an endless supply of cash on hand. Use this opportunity to explain that you earn money in a paycheck, which goes into the bank, and why it’s important to live within your means.
What to say: “Just like kids have piggy banks, moms and dads have their own pots of money—often stored at the bank. We make sure we have enough in our piggy banks for everything our family needs, plus unexpected things like car repairs. In order to have something left over to save, we need to spend less than we get paid each month.”
This is also a good opportunity to talk about how we can want something in the moment, and then realize later that we didn't really need it or use it. Practice this exercise with your child to talk about some of the things you've bought recently and whether it was a good purchase to drive the point home.
Why doesn't Lucy's dad go to work anymore?
What your kid is wondering: It’s difficult for children to understand what it means to be fired or laid off. So they look to you when something they take for granted in life—like a friend’s dad working—changes. Children are more likely to pick up on your emotional state than actual family finances, so your reaction is more important than your explanation.
Stick to the facts, but realize that the details (like why Lucy’s daddy was fired) are insignificant. Listen, answer questions and provide assurance that everything will be OK. It’s important to give your child the chance to express her worries.
What to say: “Although Lucy’s daddy doesn’t have a job right now, he is looking for a new one. In the meantime, he can spend more time at home than he could before. Are you worried about Lucy or Lucy’s daddy?”
Why don’t we get to go on a big vacation this year?
What your kid is wondering: It doesn't matter if you went to Disney World yesterday or last year; if your kid had fun, he will be asking for more. But given the changing times, yesterday's lifestyle might not be possible today.
Explain that vacations are a special treat and that this year your family is going to try something new, like taking time off to explore your local area in a new way.
What to say: “Not everyone takes a vacation every year, and we decided to save our money for other things we might need. That way, we can save up to go somewhere awesome next year. For now, why don't you choose a spot you'd love to visit and we'll create a mini version of it at home? For example, if you've always wanted to visit Hawaii, we could deck out the living room with palm trees, wear leis and order in some pineapple pizza."
What your kid is wondering: Children notice the differences between what they have and what others have, even when that difference doesn’t necessarily mean the other person is poor. Being frank is the only way to go in this situation.
What to say: “I don’t know if Steve is poor, but there will always be people who have less or more than we do. There are a lot of families who don’t have enough money for everything they need. What's important is to remember that we're all people, and they're no different from us. So, treat him just like everybody else."
Why is Jenny's house so much bigger than ours?/I wish our car was nicer.
What your kid is wondering: The rich/poor question goes both ways. It's human nature to see others with bigger and better things and wonder why that can't be yours. Your child is wondering the same thing that many of us do—he just says it out loud.
It’s never too early to squash a need to "keep up with the Joneses," and to teach your children gratitude for what they have. It's also a good time to shift the focus to all the things money can't buy.
What to say: “Every adult has a different job, and that gives them a different salary—which means that some families just have more money than others. But, we're very lucky to have what we do. I'm so grateful to live in our great home and to have delicious food to eat. And there are some things that money just can't buy, like having a loving family and traditions we have like the silly songs we sing in our car—those good times are much more important than the kind of car we have.”