Teach your kids how to manage money well and achieve financial success, by making sure they know these important financial terms for kids!
You want your kids to have a solid understanding of money and the basics of money, right?
Start by helping them know and understand these 20 important financial terms for kids.
Your goal shouldn’t be to sit them down to teach these terms all at once, but rather you should chat about these things over time.
Financial Terms for Kids
Here are some basic financial terms your kids should know (in alphabetical order):
1. 401K – A retirement plan offered by an employer to allow their employees to save and invest money for retirement. Many employers will match contributions up to a certain amount (like 2%). This means, if you contribute 2% of your paycheck to the 401K plan, your employer will also contribute 2%. You can contribute less and they will match that amount. This is basically free money and you need to take advantage of it! All kids should understand how to save and prepare for retirement.
2. Budget – A way to keep track of your money (income and expenses) so you know how much you have and where it’s going. People often budget monthly.
3. Checking Account – An account at a bank that you use to write checks in order to withdraw money as payment to another. Show them checks and explain how they work.
4. Compound Interest – Interest building on interest. Help your kids understand the value of saving and investing early in life!
5. Credit Card – A way to buy something that you don’t have cash for, or without having to pay the full amount right away. Credit card companies charge interest for every month you don’t pay the balance in full, so you will end up paying more than the item is worth.
6. Credit Score – Credit bureaus look at how you use your money (if you pay your bills on time) and give you a “credit score.” Having a high (or good) credit score can help you get a loan (to buy a car or a house, for example).
7. Debt – Money that is owed to someone and must be paid back. Some common examples of debt: credit card, student loans, mortgages.
8. Diversification – When investing, diversification refers to not putting all your money in one basket (or one type of investment or stock).
9. Dollar-Cost Averaging – This refers to steady, regular investments, as opposed to “buying low and selling high” (which, as every expert will tell you, no one can predict the market). Teach your kids to invest consistently (and start young!) to maximize the long-term benefits.
10. Inflation – This means that the general price of things is always going up. As an example, you can compare the price of common items (bread, milk, butter) from your grandparents’ time to today.
11. Interest – Extra money added onto the original amount. This can work for you (in the case of your savings account earning interest) or against you (when you have a debt that is accruing interest on top of the amount you owe to be paid.)
12. Investing – Getting your money to work for you by putting it somewhere to grow.
13. Loan – A type of debt. Money that is borrowed and must be paid back with interest. (Emphasize that you end up paying more for the item than it’s worth – due to the interest added.)
14. Mutual Fund – Money put together by several investors to invest in stocks, bonds, or other types of investments.
15. Net Worth – The difference between what you have and what you owe. Add up your assets and subtract the amount of your debts. You want to have a positive net worth!
16. Opportunity Cost – The potential benefits (or losses) when choosing one thing over another. For example, if your child wishes to buy a Lego set with her money, then she won’t be able to buy a Barbie.
17. Retirement – When someone stops being in the workforce or actively working. Encourage your kids to start preparing for retirement while still young and take advantage of compound interest.
18. Savings Account – A bank account where your put money to earn interest. Most bank accounts earn a low interest.
19. Stock – A small piece of a company that you can own. Every stock has an individual price that goes up and down depending on the success or failure of the business.
20. Taxes – Payments to the government for the needs of society (like fixing roads or maintaining schools and libraries). The amount you pay depends on how much you make, and taxes are taken directly from your paycheck.
Money conversations should happen throughout your child’s life. Start by helping them understand these important financial terms for kids!