Even though your child is young, they’re ready to learn about money. Knowing key financial words introduces your child to important financial actions and decisions. One such action is earning an income.
1. Income
What do birthday money, money from the tooth fairy, and cash from chores all have in common?
They are each a form of income.
Income is money that your child receives. Your child can earn money through chores or by receiving money from friends and family. Earned income is more common.
There are numerous ways to earn an income. Knowing different ways to make money broadens your child’s perspective. In general, the four income pathways are:
- An employee – someone who has a job (or in kids’ case, working for their parents)
- A freelancer – someone who owns a job (or is self-employed)
- An investor – someone who owns investments (stock, real estate etc.) and
- A business owner – someone who owns a business that sells products or services
Being an employee has been the primary way to make money. But that’s changing. Technology and the internet create other earning opportunities like entrepreneurship, even for kids.
Earning an income fuels your child’s saving and spending activities. Let’s look at savings in greater depth.
2. Savings
Saving is the portion of income that is set aside for future use. One of the ways your child can save money is to pay your first. The following quote highlights this technique.
“Do not save what is left after spending, but
spend what is left after saving.”
Warren Buffet
Let’s say your child has been saving for a while. What will they do with all that money?
They could place it in a piggy bank.
But, it would be wiser to open a savings account at the bank. The advantages of having a savings account are:
- The money is FDIC-insured, protected from theft up to $250K.
- Your child earns interest on their savings.
- The money is readily available through ATMs.
- Having an account is low-risk.
- It doesn’t require a big investment to open the account, unlike investing.
Next, let’s look at the opposite of saving, spending.
3. Spending
Spending is exchanging money for goods or services. Said another way, spending is the portion of income for current use.
Spending reduces your child’s resources, which may lead to low savings and debt. That’s why wise spending is important.
Here are a few ways to teach your child intentional spending:
- Make a game of subtracting coins, pasta, or cereal pieces with younger children,
- Ask older children about the opportunity cost of spending,
- Practice comparison shopping at the grocery store.
If you want to do a financial activity with your child, check out the link below.
>>> More: Grocery Shopping Hunt
Closely related to spending is the concept of expenses.
4. Expense
An expense is an item’s cost. Expenses can be grouped into needs or wants.
A need is a required expense, like clothing and school supplies.
A want is an optional expense. Something nice to have but unnecessary, like buying a toy or going to the movies.
Distinguishing between a need and a want will help your child develop good spending habits.
>>> More: The Needs vs Wants Game
Other spending habits your child can develop are:
- Avoid impulse buys by using a shopping list
- Practice delayed gratification for wants
- Set financial goals
- Keep an emergency fund
- Make a budget
Let’s look at the last bullet in more detail.
4. Budget
A budget is a written plan for how your child saves and spends their money.
While budgeting often involves managing resources over a month, children this age are more familiar with individual transactions, like buying a video game.
By focusing on budgeting for a single purchase, your child can deepen their understanding of income, expenses, spending, and savings.
Consider using a simple budget template, like the following, for your child’s next purchase.
Next time your child wants to buy something, ask them questions such as:
- Income – How much income do you have (#1)?
- Expense – How much does this item cost (#3)?
- Spending & Savings – If you buy this item, how much income is left over (#5)?
Talking with your kids about money will go a long way to helping them develop financial skills.
Conclusion
Learning key words, like income and expense, enhances your child’s financial vocabulary. And aids in managing financial activities, like saving, spending, and budgeting.
Continue their learning. Choose one of the five financial words to talk with your child about today.
Contributor