What We Make vs. What We Spend
Giving kids the low down on how the income/expense equation works, can give them a head start on future financial independence.
Income. First, define income in an age-appropriate way your kids can understand. When young, you can explain income to children by using the examples of holiday gifts, i.e. birthday money and allowance. When they get a bit older, their income starts to come from lemonade stands, babysitting or pet sitting, yard work, or household chores.
Expenses (or “outcome”). Then comes the explanation of expenses, which can be defined as anything that we need to live, such as food, housing (and associated costs), clothing, medical care, and transportation. Explain that kids don’t have these expenses until they are adults, however, expenses are also anything we “want” that’s not necessarily something we need. This may include vacation, entertainment, or an expensive car. For your kids, this list might include the latest toy, video game, phone or sneakers. Your kids will very likely understand “want” expenses quite well!
How income and expenses work together. Here’s the really vital part: learning about the relationship between income and expenses. Your kids should understand that your income must be greater than your expenses so that debt isn’t incurred. A good example for younger children is to add up their birthday money. Let’s say it is $40. Ask your child what’s on his/her “want” list and find out the price of that item. If it’s less than $40, they will have some profit left over. If it’s more than $40, you can explain that they cannot buy what they want until they save more money, or to illustrate debt, that they could loan the extra money from you and have to pay it back. As kids become teenagers and they have jobs, this concept becomes easier to understand. This is the time to talk about the options--they can make more money, spend less money, or the combination of the two.
It’s important to talk about income and expenses early, in whatever method your child can grasp. This will help them make informed spending choices in the future.