As parents, it’s natural to want to protect your kids from your worries. But children often pick up on parents’ anxieties, whether they realize it or not. In the current economic climate with inflation at a forty-year high, many of us are worried we might be headed for a recession. Even if you haven’t mentioned it in passing, it’s a word your kids may hear on the news. If so, they may be wondering what recession means and how it might affect them.
You don’t have to be an expert on finance to talk to your kids about money. But you do need to be able to explain in a way they can understand. To help, here’s how to talk about recession to your kids in simple terms. Read on for tips on describing what a recession is, what causes it and what can happen during a period of economic downturn.
What is a recession (in simple terms)?
A recession happens when an economy shrinks for more than a couple of months. It means there’s been less demand for goods and services, and that has a knock-on effect. Businesses shut down and people lose their jobs.
In the US, the National Bureau of Economic Research (NBER) is responsible for declaring a recession. It monitors all sorts of data, including—personal income, employment levels, how much people are spending, industrial production and gross domestic product (GDP).
GDP is the total value of all goods and services the country produces. When GDP is growing we’re in a period of expansion. When it’s shrinking, we’re in a recession.
Related: How to teach your kids about money
Tips for talking to your kids about recession
GoHenry research shows 68% of kids are worried about the current cost of living crisis. So when you’re talking about recession, it’s important to do it in a way that doesn’t heap on more anxiety for your kids.
“Honesty and communication are key,” says Beth Zemble, VP of Education at GoHenry, “but always communicate at a level your kids can understand and assure them of their safety. If you explain a problem, offer solutions to it that kids can be a part of so they feel like they’re helping. For example, if you’re finding you need to make some adjustments to your budget, involve your kids in the change in lifestyle.”
Here are some tips to help.
Keep calm and speak clearly
Bear in mind your kids aren’t just learning from what you say, but how you say it. If you come across as stressed and anxious at the thought of a recession, they’re sure to pick up on it.
Dial down the drama by keeping your tone conversational and calm. Speak clearly. And encourage your child to ask questions and share what they’re thinking and feeling.
Help them understand the big picture
An understanding of the bigger picture will help your kids see a recession is just temporary. Explain it’s part of what’s called the business cycle.
All economies go through this cycle—ups and downs are normal. So if a recession is coming, it’s not the first time it’s happened and it won’t be the last. What’s more, recessions tend to be much shorter than periods of economic expansion.
To illustrate this, try giving your kids some facts.
Since World War II there have been 13 recessions in America, lasting an average of ten months. But some have been as short as two months. And in between times, there have been periods of economic expansion usually lasting four to five years.
Describe the different factors that cause a recession
When you’re describing what causes a recession, it helps to give your kids real-world examples or scenarios they can relate to. Here are some of the most common causes.
An overheated economy
Sometimes an economy grows too fast causing it to overheat. In simple terms, it’s when people want to buy more from shops than factories or farmers can supply. When supplies are scarce, it pushes the prices up. And that’s called inflation.
You notice inflation when items you regularly buy cost you more, like milk, cookies, or candy. It affects the value of money. When prices go up, money is worth less because it doesn’t buy you as much.
Inflation can be a symptom of an overheated economy. And when something gets too hot, it needs time to cool down before it can function well again. You can’t keep running for hours without breaking a sweat and needing a cool drink and a rest, for example, can you?
An economic shock
Sometimes a global event can cause shockwaves that have a ripple effect on the economy. The Covid-19 pandemic of 2020 is a classic example. The world shut down, causing businesses to struggle and close which meant people lost their jobs. (Although serious as it seemed, that recession only lasted two months.)
War is another example of an economic shock that can cause a recession. For example, gas prices were already high, but Russia’s war with Ukraine has made them skyrocket worldwide.
When something happens you weren’t expecting—like a balloon popping, or a sibling jumping out from behind a door as a joke—it can give you a shock. Your heart rate goes up and it can take a beat or two before you feel normal again. It’s the same with the economy.
A financial bubble
Ever blown too much air too fast into a bubble and it burst? You’re left with nothing but a soapy mess, right? Well, it’s the same with a financial bubble.
Financial bubbles happen when people get over-excited and invest too much money in something like real estate, stocks or bonds. The value gets over-inflated fast and bursts. The value of real estate or stock takes a nose-dive and people lose their money.
A good example of this is the Great Recession of 2007-9. The US housing bubble burst and sent America into a recession lasting 18 months.
Describe what happens in a recession
When an economy that’s been booming experiences a slowdown during a recession, it’s not just business owners who feel the effects. They can trickle down to everyone.
In a severe recession, businesses shut down and unemployment rises. Without jobs, people may struggle to pay rent or a mortgage, putting their homes at risk.
In a mild recession, you’ll hear about it 24/7, but you may not feel the effects at all.
Explain how you’re prepared for recession
The key to weathering a recession is watching out for signs and being prepared. It’s a bit like seeing clouds gather in the sky. When they turn dark gray, you can be pretty sure rain’s coming. So you fetch an umbrella and put on your gumboots and raincoat. That way, whether the rain’s torrential or just a light shower, you won’t get soaked.
Explain to your children that you can’t control the economy, but you can control what happens in your household. Reassure them there’s no need to worry because you’re prepared. That gives you an opportunity to talk about money management and why saving, budgeting and spending wisely are important.
You could also explain why having an emergency fund is vital. Like an umbrella and gumboots, it’s there to protect you from the effects of job loss. Or a sudden illness which means you can’t work for a while.
Sure, if there is a recession, it might mean some belt-tightening, to save money. Give your kids concrete examples of what this might mean.
For example, you may go out to eat less often as a family and there may be fewer trips out. There may be fewer treats included in the weekly grocery shopping too. And that raise on their allowance? It might have to wait a while.
It’s also an opportunity to get your kids to think about those less fortunate than themselves and open up a conversation about giving. Discuss ways you can help other families who might be in financial difficulties. By donating to food banks, for example, volunteering for a local charity or serving food at a homeless shelter.
How can GoHenry help?
Kids learn best by doing. So when you’re talking about budgeting, saving, and spending give them a way to put theory into practice with their own money. GoHenry can help.
A prepaid debit card for kids and financial education app, GoHenry comes with a companion app for parents. You can pay in their allowance, track progress, set flexible boundaries and goals and get real-time notifications every time they spend. Your kids learn by using their card and you get peace of mind.
Plus, your kids can learn money skills through videos, quizzes and interactive games on Money Missions. An in-app tool designed to accelerate your child’s financial literacy, it’ll teach them about budgeting, saving, investing, and more.