Adults aren't the only ones feeling the strain of the current financial crisis. Kids also feel the stress by how their parents act, and what they see on the news. Now would be a great time to reassure your children, and use the slumping economy as a lesson in personal finance.

You can't help but envy kids these days. They only have to worry about their Facebook profile, or how they're going to scrape up enough money for the movies this weekend. The last thing they've got on their minds is the worldwide financial crisis.

Or is it? Kids can easily feel stress in the household, even though they may not understand the precise cause of the tension. With the media's relentless reporting of the financial crisis, young people can see that our country is facing some serious problems.

Kids need open communication about these tough times. Talk to them honestly about the situation. You can help allay some of their fears, and use the crisis as a learning tool for a child's personal finance management education.

Start with a history lesson

If you listen to the media, the financial crisis seems like the end of the world. Reassure your children by explaining to them that our country has encountered these types of problems before. The economy tends to have fluctuations, and it's natural to suffer a downturn.

Point out how we can learn from the mistakes of the past. The current initiatives to make credit more available, for example, are a sharp contrast to the government's inaction during the Great Depression. The hardships caused by the Smoot-Hawley Tariff Act of 1930, which significantly impaired our nation's ability to trade, also added to the economic decline during the Depression. This will help you explain why protectionism won't solve our current problems.

Segue into personal finance

After you've taken an unpleasant trip down economics memory lane, you can make the country's monetary problems a personal finance lesson. Point out how many of the problems began with our overall housing market-particularly subprime mortgages. Lenders began offering adjustable-rate mortgages, with low introductory interest rates that made mortgage prices artificially small. People overspent, relying on escalating home values to offset their increasing debt.

When the housing market declined, subprime lenders crumbled, followed by the large financial institutions that had securitized the bad debt. Complicit in the problem was the U.S. government. In its zeal to spur the housing market, the government encouraged Fannie Mae and Freddie Mac to buy suspect mortgages.

The personal finance lesson to be derived from all these macro events is simple: Don't spend more than you can afford to. Banks and homeowners over-extended themselves, and the result is a financial crisis on a global scale. It's essential that you take the time to educate your children about the root cause of the poor economy. Not only will it reassure them, but hopefully, it will prevent this debacle from ever occurring again, when they become adults.

Published on November 18, 2008