An important concept for kids to understand is that throughout their lives, they will have money coming in and money going out. Income is any money that comes in; money goes out to pay for expenses - the goods and services that we need and want.
|Income = money comes in (allowance, gifts, jobs, etc)|
|Expenses = money goes out (goods and services you buy)|
When children are young, their primary sources of income include gifts (e.g., birthday money from grandparents) and allowance. As kids get older (but are still too young for a traditional job), they can add to their incomes by completing tasks for your family (you, grandparents, uncles and aunts, etc.) and your neighbors. For your child’s safety, provide adequate instruction and supervision, and do not allow your child to solicit jobs by going door-to-door. In addition, make sure that any job is age appropriate - a 16 year old may be able to earn money by mowing the neighbor’s lawn, but your 10 year old should stick to raking the leaves or pulling weeds.
If your child is interested in earning a little extra money (income), you can help him or her brainstorm for ideas. Here are a few (appropriate for most tweens) to get you started:
Yard and garden work - rake, weed, spread mulch, plant flowers, harvest vegetables, etc. Make sure your child has the right tools for the job, such as gloves for weeding, or sunscreen, hat and water for a hot day in the sun.
Pet sitter - take care of pets while the owners are out of town: feed, water, clean the litter box, walk the dog, play with the animals, etc. If your child will be taking care of a dog, make sure it is friendly, and plan on going with younger children to supervise.
Dog walker - take dog(s) out for a walk after school or on weekends. All dogs need exercise year round, and often owners do not have time between work, family and other obligations. It is very possible to generate a steady income flow by walking several dogs each week. Make sure each dog is friendly before letting your child walk it, and if more than one dog will be with your child at a time, see how the dogs act together. Younger children should always be supervised around dogs.
Lemonade stands - as American as apple pie, the lemonade stand is the proverbial introduction to entrepreneurship for many kids. Help your child make a plan so that the stand can be successful (for example, assist with pricing, supplies, signage, etc).
- Parent’s helper - in general, tweens are not old enough to babysit yet, but they can help while an adult is still at home. For example, a mother may need some time to accomplish a task, but would be present if your child needed help caring for their little one.
Your child will probably be very interested in learning how much money he or she can earn for a particular job. In general, this depends on your location and the going rate (the local "job market"), the difficultly of the job and the amount of time it takes. Some jobs, such as a parent’s helper, will likely fetch an hourly rate. Others may be paid by the job - such as $5 to rake the lawn, or $2 each day for pet sitting. Talk to other parents in the neighborhood to find out the going rate and determine what is fair for each job. Encourage your child to set a price ahead of time and make sure their "client" agrees to the price. It is a harsh lesson for kids to learn if they thought they were getting paid $20 to weed an entire flower bed only to find out the neighbor thought the work was being done for free.
The money kids earn can also be the result of sales, as would be the case with a lemonade stand. Explain to kids ahead of time that there is no guaranteed income when they are trying to sell something, and that the better they plan, the more likely they are to earn money. Now is an excellent time to introduce the concept of profit and loss. Their lemonade stand can make a profit if their earnings (how much money they make through sales) exceed their expenses (how much money they spent on inventory and supplies - the lemonade, cups, signs, display, etc). Their enterprise will operate at a loss if their expenses are greater than their earnings. Point out that while there is the risk that their business could lose money, there is also the opportunity to earn a nice profit.
|Profit = earnings are greater than expenses|
|Loss= expenses are greater than earnings|
Expenses are the goods and services that we need and want. While adults have a long list of expenses, most kids will have a relatively small number, and most of them will be wants, rather than needs. The concept of needs versus wants is introduced in our Teaching Financial Literacy To Kids guide. When explaining expenses to your tweens, it is helpful to review this important idea: the more they grasp the distinction, the better they will be able to make sound spending choices in the future.
Needs are the things that we must have in order to survive - clothing, medical care, nutritious food, shelter, transportation and basic utilities. Wants are everything else - the things we don’t need to survive, but that we would like. While most people generally have the same needs, our wants vary depending on our ages, personalities, interests and environments.
Explain to your child that his or her wants will likely be different from yours, for example. List a few of your wants (e.g., new car, better storage for the garage, new appliances for the kitchen) and ask your child to list his or hers (these might include things such as cell phones, electronics, designer clothes). Ask your children to think about how their wants might change in the future; for instance, when they get a little older, they might want to buy cars. Discuss with your child that while people have a limited ability to reduce the amount of money that is spent on needs, each person (and family) has control over the amount of money that is spent on wants: it comes down to spending choices.
Relationship Between Income and Expenses
A very basic and extremely significant financial concept is that income must exceed expenses in order to avoid debt (owing money). If your income is greater than your expenses, that’s great - you will have money left over to save, spend and share (more on that later). If your expenses are greater than your income, however, you will have to make some changes in order to avoid getting into debt.
You might briefly touch on the concept of good debt versus bad debt. Good debt includes things that you need but can’t afford to pay for all at once - things like a home mortgage and student loans. Even here we can still get into trouble by taking on more debt than we can comfortably handle: you must be able to afford your monthly payments. If you won’t be able to, take on less debt; for example, buy a less expensive house, or take required classes at your local community college instead of at a four-year school (many four-year colleges and universities accept credit from community colleges, and you still graduate with a degree from the four-year institution).
Bad debt, on the other hand, includes loans that you’ve taken out to pay for things you don’t need and can’t afford - such as pricey electronics, luxury cars and expensive vacations. Because kids don’t have access to loans (except from you), most cannot get into debt, but instead can run out of money for things they really want. So even though the outcome may be different (adults would go into debt; kids simply run out of money), the relationship between income and expenses is an important concept to discuss.
|Income > Expenses = Good (savings)|
|Expenses > Income = Bad (debt)|
In general, people have three choices if expenses exceed income:
- Make more money
- Spend less money
- A combination of the two
Discuss with your child ways that he or she could earn more money. For example, they could take on an extra odd job each week, negotiate a better rate with existing clients (such as an extra $1 each day for pet sitting) or get an allowance raise based on extra responsibilities and/or age (many people recommend a weekly allowance of 50 cents or $1.00 per year of age, so kids get an automatic "raise" each birthday).
It is equally important to help your child figure out ways to reduce spending. Most kids (and adults) can tell you exactly how much money they have coming in from various sources, but few can account for all the money going out. Help your child keep track of expenses by having him or her keep a spending journal (such as a small notebook, or an index card for each day or week). Once your child sees - in black and white - what he or she is spending money on, it may become easier to cut back on certain things.
Even if your child is managing to save a little money, it is important to discuss ways to reduce spending and to make smart spending choices. When making a purchase, remind your child to ask:
- Do I really need/want this now?
- Is this more important than my other wants?
- Can I borrow it instead?
- Can I wait two weeks and see if it’s still important to me?
This one habit (asking these questions before every purchase) can help your child avoid impulse buys and unnecessary purchases, now and in the future. Imagine if you had asked yourself these questions before every purchase you ever made. Would your financial situation be different now?
Assets and Liabilities
While teaching your child about income and expenses, you can touch on the topic of assets and liabilities. Assets are everything that you own, and liabilities include everything that you owe.
|Assets = what you own|
|Liabilities = what you owe|
Your child may have heard that some people are financially rich. Explain that your net worth is the amount by which your assets exceed your liabilities, and everybody - whether "rich" or in a lower income bracket - has a net worth figure. Point out that some people appear rich - they might live in an expensive house, drive a fancy car, go on extravagant vacations and have all the cool "toys" - but they may not be wealthy at all if they owe a lot of money for these things.Teaching Financial Literacy To Tweens: Spend, Save And Share
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