10 Financial Terms To Teach Your Child About Money
Most schools don’t teach the basics of finance and it’s crucial information for success.
As a parent, you can empower your children with financial literacy from an early age so you can save them time and mistakes as adults.
So if you don’t know where to start teaching your child, this article explains key financial concepts clearly.
By teaching these terms, you’re not just imparting knowledge but laying the foundation for a lifetime of smart money management and independence.
Here are 10 finance terms to teach your child and how to explain each term to them:
1. Money
Money is the backbone of our financial world and the economy that holds everything together. Understanding it is crucial for both you and your child.
When we talk about money, we mostly refer to physical bills and coins used to buy things. But nowadays, it’s more than just cash; it includes digital transactions and various payment methods.
Money is the tool that makes trading possible. It’s what people use to exchange goods and services. From groceries to utility bills, money is the key to accessing what we need and want.
People earn money when they create value for another person or society. How much money you make is directly proportional to the value you provide to society. The richest people in the world have this in common — providing technology that changed how people lived in their lifetime.
Explaining what money is to your child is important especially since it is more than having many paper bills today. It shapes their mindset about the possibilities of making money.
2. Budget
A budget is a financial guide. It’s the tool that helps people manage their money with confidence!
A budget is a plan that outlines how one would spend and save their income. It’s like mapping out your financial journey, ensuring every dollar, naira or cent has a purpose. Like planning meals for the week or organizing family outings, a budget ensures that money is wisely allocated.
Implementing a budget means taking control of your finances. It involves determining income from salaries, allowances, or other sources and deciding where it will be allocated.
The most common budgeting rule is the 50–30–20 rule. 50% of income goes to needs, 30% to wants, and 20% to savings or debt.
For example: 50% of income goes to necessities like groceries and bills, 30% to get wish list items, and 20% for future goals like vacations or college funds. By adhering to a budget, you ensure financial stability and avoid overspending.
By understanding how budgets work within a family context, children learn to make informed financial decisions and develop healthy money management habits that will benefit them.
Involving them in budgeting discussions prepares them for financial independence and success as they grow older.
Read also: 4 Money Lessons to Teach Your Child According to Rockefeller.
3. Needs & Wants
Imagine needs and wants as the two sides of a coin — they’re both important, but serve different purposes in personal finance.
Needs are the essentials, like food, shelter, and clothing — things we can’t live without. While wants are the extras, like toys, gadgets, or fancy desserts — they’re nice to have but not essential for survival.
For example, everyone needs nutritious meals, a warm bed to sleep in, and clothes to wear. But everyone can live without buying a new video game or the latest fashion trend — they simply have that on a wish list and will buy it if they can afford it.
A child’s understanding of needs and wants lays the groundwork for responsible decision-making and prioritizing spending. This knowledge empowers them to make thoughtful choices about how they use their money, budgeting for their needs before indulging in their wants.
Create a fun task to help them learn budgeting at home.
4. Saving
Saving is simply planting seeds for the future — it’s setting aside money now to use later. It’s stashing dollars in a piggybank or jar.
Saving means not spending all your money now, but setting some aside for future goals and emergencies.
Saving money can be for all sorts of things! It might be for an item or a day out with friends and family. Or it could be for bigger goals, like saving up for college tuition or a vacation. And don’t forget about emergencies — savings can give you peace of mind when unexpected expenses come.
Teaching kids about saving helps them plan and be prepared for whatever life throws their way in the future. It’s a lesson in delayed gratification and the value of patience.
Show them how to save from the money you give them. It’s a lesson in goal-setting and self-discipline. You’re also giving them a valuable life skill that will serve them well as they grow older.
5. Investing
Investing is another way to save money for the future but this time it’s growing — when investing, your money grows over time and yields returns.
So, instead of keeping your money in a piggy bank or savings account, investing means putting it into things that can earn you more money in the future. It’s like giving your money a job, intending to help it grow over time.
Investing can take many forms. It could mean buying stocks in a company you believe in, investing in a mutual fund, or even putting your money into real estate.
Here, the idea is to put your money into something that increases in value over time to earn a return on your investment.
If you’re praying for your child to be wealthy in the future, teach them about investing — how to make their money work for them. Let them understand the power of compound interest and the benefits of long-term saving.
Illustrate investing using seeds:
Plant an apple or orange seed. They will expect to see the new fruits very soon but that’s an opportunity to let them know that it takes time to see fruits grow and get ripe after planting.
It’s a lesson in patience and perseverance — while investing can be exciting, it’s also important to stay focused on your goals and stick to your plan, even when the market gets bumpy.
6. Debt or Credit
Debt is like borrowing something from a friend but instead of toys, it’s money. When someone borrows money, they promise to pay it back later, usually with a little extra called interest. Debt can also mean Credit.
Debt is a big part of how people achieve their goals, like buying a house, going to college, or starting a business when they lack the money upfront. It is a useful financial tool that helps people reach their milestones in life.
But it’s important to use it wisely because borrowing too much can cause problems later.
Debt can help you increase your future income. One should never take debt to do things like buying new clothes, or food, going to parties, or travelling for a vacation.
Teaching your child about debt will allow them to make smart money decisions.
So, by explaining debt, you’re helping your child understand its importance in finance.
7. Profit & Loss
Profit and loss are derived the same way but the only difference is a negative. It’s an important concept in business finance.
Your profit or loss is calculated as the Selling Price minus Cost Price.
Imagine buying a book for 300 Naira and you resell that book to a friend for 350 Naira, you’ve gained a profit of 50 Naira. But if you sold it for 250 Naira, the difference would be a loss because the cost price is higher than the selling price.
Every business aims to make a profit and not a loss. Companies use them to see if they’re making money or need to make changes to stay in business.
Even when saving up your allowance for a new video game, understanding profit and loss can help you decide if you’re on track or need to save more.
Understanding profit and loss teaches kids about the value of money and how businesses work. It shows them that making smart decisions can lead to success while being careless can lead to problems.
So, whether it’s for them to run a business or just want to be savvy with their pocket money, knowing about profit and loss is an advantage.
8. Inflation
Inflation is when the prices of things go up over time, and the value of money goes down. It’s an unavoidable event in the economy.
Inflation is like an insect that slowly eats away at the purchasing power of money. When prices increase, the same amount of money can buy less stuff. This affects everything from how much groceries cost to how much you need to save for college, a car, or a house.
For example: if 500 naira could pay for 10 items in 2014, that amount can only buy one small item today. That’s inflation.
Inflation can have a big impact on money. If you’re saving up for anything and prices keep increasing, you might need to save more money to buy it.
And if you’re not careful, inflation can even make your savings worth less over time, so it’s important to balance saving and investing to grow your money and protect you against inflation.
Inflation may seem like a big term to cover for a child but it is really just teaching them the basics of price increases in the economy and how it affects them.
9. Taxes
Taxes are a contribution we make to our community. When we buy things a portion of spent goes to the government. It’s used to pay for things that benefit everyone, like schools, roads, and hospitals.
Without taxes, things like schools, hospitals, and emergency services won’t be possible. They also play a big role in shaping the economy by influencing how much money people have to spend and how much businesses can invest.
When we earn money or buy things, we often pay taxes. So, taxes affect how much money we have to spend and save. In some countries, taxes are not emphasized to citizens but that doesn’t mean it’s unimportant.
Children need to understand how society works and the responsibilities of being a part of it. It helps them develop a sense of civic duty.
10. Giving
Giving is all about sharing what you have with others who might need it more to live.
It could be donating money to a charity, or supporting a selfless cause.
When you share your money or time with others, you impact society. It’s not just about what you have; it’s about how you choose to use it to make a difference in other people’s lives.
Giving freely without expecting anything in return, creates a ripple effect of kindness that can make the world a better place for everyone.
When kids understand the joy of giving, they become generous and thoughtful adults who see giving as part of financial growth.
Conclusion
From grasping the concept of budgeting to navigating investing, each term lays a crucial building block for your child’s financial future.
By teaching them these concepts early, you empower them to make informed decisions, set achievable goals, and navigate life’s financial challenges confidently.
Also, when you hand over their trust fund to them in the future, they will be able to make the best of it.
Start building a trust fund for your child on Houseriver.
FAQs
- How do I teach my child about money?
Explain that Money is the tool that makes trading possible. It’s what people use to exchange goods and services.
2. What terms should my child know about finance?
Money, Budget, Saving, Investing, Giving, Debt, Credit, Profit & Loss, Taxes, Inflation.
3. How can I start investing for my child?
Open an account on Houseriver.
Houseriver is a platform that enables parents to invest for their children.
