How Parents Should Talk to Their Kids About Family Finances

Do you know when to keep your lips sealed?

Father and son
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Parents are constantly fielding questions from their curious youngsters, many of which they can answer with ease: Why is the sky blue? Does Santa exist? Where did all the dinosaurs go? But the real challenge comes when kids start asking about the family's finances.

Part of the issue stems from parents who are reluctant to talk to their children about anything related to money. Most parents say it's easier to talk to their kids about drugs than it is about money, according to a survey published in March by investment management firm T. Rowe Price. Those who do broach the subject have difficulty telling the truth: 77 percent said they're dishonest with their kids about money-related items, with 15 percent not telling the truth at least weekly.

Some parents may fear how their kids will handle what they say. Even answering a simple question, like "Are we rich or poor?" can have repercussions. Tell your children you're rich, and they'll think you can buy them anything they want. Tell them you're poor, and they may feel guilty about how much they ate for dinner.

Other parents may think money isn't fun to talk about with their kids. "When I would talk to my son about money, my stepmother would say, 'You're talking to him too much about money. Can't he just be a kid?'" says Alan Wolan, author of Moneyology, a book series about money geared toward young kids.

[Read: 6 Fun Ways to Teach Kids About Money.]

Growing up, Wolan says his parents would go into the other room and whisper in hushed tones when they wanted to talk about the family's money. Wolan didn't agree with his parents' approach, so he actively encourages his son to ask any money questions he has.

One question a child might ask a parent: "How much money do you make?" Brad Klontz, a clinical psychologist and direct of research at H&R Block Dollar$ & Sense, which gives parents tips on how to talk to their children about money, says it's best not to divulge the exact amount—unless you're comfortable with the entire world knowing how much you make. "Kids aren't good at keeping secrets," he says. You'll probably satisfy them by saying you make enough money to get by, since their curiosity likely derives from them wanting to know if the family is financially secure.

Jayne Pearl, coauthor of Kids, Wealth, and Consequences: Ensuring a Responsible Financial Future for the Next Generation, says some parents feel the need to shield their kids from the family's financial situation. "Some parents would never tell their kid anything negative. While that's understandable, because their instinct is to protect, I think that's a mistake," she says. "We should tell our kids the reality in bit-sized pieces."

[Read: How to Save Money on Toys for Your Kids]

Yet that reality may be a despairing one for the family if, say, a parent has lost their job or they're so far behind in mortgage payments they have to sell their house. In those troubling times, full disclosure is probably not the best way to go, says Klontz. "Over-sharing can damage a young child's self-esteem," he says.

But not telling your children at least some of what's going on could scare your kids even more. Susan Beacham, CEO and cofounder of Money Savvy Generation in Lake Bluff, Ill., a company that develops products to help parents and educators teach children to make good money choices, says kids are instinctual and will pick up on financial strain if their parents appear stressed or anxious.

Beacham says many parents mask financial problems because they don't want to appear like they've failed in the eyes of their children. Adults also may carry shame related to the loss of a job or piles of unpaid bills, she says, and they want to preserve their image as the perfect parent.

[Quiz: Are You Spending Too Much on Your Children?]

But parents may do more damage if their children stumble onto what's going on, possibly by overhearing a conversation. To minimize the damage, married couples can sit down together to determine the best way to break the news. "You don't want to shoot from the hip," Pearl says. She adds it's important to be on the same page as your spouse so that the message you deliver is consistent.