Key takeaways

  1. Younger children, who are grasping the concept of money as a limited resource, often question why you can't simply get more at the bank
  2. As kids grow up and ask about prices, parents can introduce the basics of supply and demand
  3. Teens are usually prepared for complex financial topics such as compound interest and how stocks work

When do children start to develop their own financial routines? Studies have shown it can begin as young as seven. More interestingly, curiosities around money often begin at a younger age.

As parents, it is important to teach our children about finances from a young age. This not only prepares them for future financial responsibilities, but also instills valuable life skills. 

By starting these conversations early on, we can help our kids develop healthy attitudes towards money and avoid common financial pitfalls in the future.

It may seem daunting at first, but with open and honest communication, we can empower our children to make smart financial decisions now and in their adult lives.

Here are 7 common questions your kids might ask you about money and how to answer them without panicking.

How/where do you get our money?

For younger kids, it may appear that parents have an endless cash reserve, but eventually, they'll get curious about where it all comes from.

This question presents an important teaching moment to explain how money doesn’t grow on trees; you only get a certain amount from work every week or other week. That is how much you must live off of until the next paycheck arrives.

This introduces the important idea that money is a limited resource—and it might just help them realize that work isn’t really a choice but rather a necessity.

What’s the true cost of raising a child?

Can’t you get more money at the bank?

To a child, ATMs are free money machines. Whenever you need some, you simply jab at a few buttons, and voilà, out comes the green. The same goes for credit cards and mobile payments—it’s all so easy. 

The problem is that the easier it becomes to acquire and spend our hard-earned cash, the harder it is for children to understand the concept of intentional spending.

Children (especially young ones), have a hard time grasping the fact that your money supply is finite. Here’s one way to teach them the concept of scarcity.

Put seven one-dollar bills in a jar or piggy bank and take out $1 daily for a week. When they ask where each dollar is going, tell them it will pay for a bill that is due. You can get creative if you want: “This dollar will pay your weekly cookie bill.” That might resonate better than saying it’s for the electric bill.

Seeing their “account” dwindle every day will help them understand what it’s like to have money regularly diminish. To take this exercise one step further, at the beginning of the following week, you can replenish their bank with a fresh $7. In doing so, you created a revolving account, which also helps to satisfy the first question.

Why do we have less money than my friends?

Most of our teenage years are spent comparing ourselves to others, and parents bear most of this angst.

Whether it's the fancy car down the street or a friend's recent European ski trip, kids begin to observe everything they don't have as they mature. This curiosity often sparks questions about how your family's financial situation stacks up against others.

Of course, you don’t have to tell your kids the exact amount you make—whatever you share will likely sound like a lot. What's important, though, is that you explain that different families have different goals and requirements, and perception isn’t always reality. 

For example, one family may have generational wealth while another is buried in debt but acts like they grow money trees in their backyard.

Other families have different priorities, too. One might spend more money on vacations, while others focus on saving for college or retirement

You just never know.

What’s important is to teach your children that comparisons are not always fair or accurate and that focusing on their own goals and values rather than what others have is what matters most.

Why are some things more expensive than others?

Aside from perceived value, products are priced according to supply and demand. But explaining that concept to a child isn't easy. Here's how to do it.

Start by picking a widely sold, popular product that is always coming out with a new version every year. Skin care products or video games are great examples.

Now, ask your child why they think the latest line or edition costs more than the previous year's version.

The answers here will vary, of course, and that's good—it shows they are thinking. They may even come up with the right answer: people typically want the latest version the most. This 'want' creates demand.

Then, there's the supply—which is created by demand—that determines the price. 

Suppose you are one of 100 who got an advanced copy of next year’s version of Madden NFL. If you turned around and sold it online, there’s a good chance you could sell it for a profit since the supply (of 100) is so limited. The smaller the supply, the higher the price, and vice versa.

This is just one of countless examples you can use to explain why things cost what they do. Have fun with it, and remember to use examples that resonate with your children.

Why do some jobs pay more than others?

The law of supply and demand also affects people’s salaries. In-demand industries typically pay more, especially for employees with specific, rare skills.

One example is an Oral and Maxillofacial Surgeon. Their average pay is one of the highest in the nation at $239,200. These surgeons are specialists, and there aren’t many of them, which means the ‘supply’ is low. Only top salaries will attract the best talent.

So why do other careers pay much lower wages? Simple: the supply is much bigger because there is a higher number of qualified candidates. 

According to the US Bureau of Labor Statistics, retail salespersons rank as the most popular occupation, with ~3.6M employed as of May 2022. 

Why? There are a ton of stores in need of people to operate them. Given the abundant supply of workers and low-entry requirements, stores don’t have to pay top dollar to hire and retain new talent. Unsurprisingly, retail workers make an average salary of about $30,000.

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What is inflation?

Inflation has been a hot topic for a few years now, so you might get a few questions about it, especially from teens. Here’s what it is.

At its core, inflation represents an increase in the overall cost of goods and services. Various metrics can gauge this, with the Consumer Price Index (CPI) being one of the most prevalent methods in the US.

What is the CPI? It represents a weighted average of the cost of a collection of consumer goods and services, with a focus on transportation, healthcare, and food. Inflation occurs when that average increases month over month.

Some inflation is normal; it indicates a growing economy. However, when the demand for particular goods and services grows more rapidly than the speed at which it can be produced, that’s considered inflation. It can also occur when companies experience rising internal costs, which are then transferred to consumers. 

So, how do you explain inflation to a kid? 

Imagine you have a piggy bank, and last year, you could buy five chocolate bars with the money in it. But this year, when you take the same amount of money to the store, you can only buy four chocolate bars with the same amount of money. 

Even though you have the same amount of money as before, things in the store have become more expensive, so your money can’t buy as much as it used to. This is what’s called inflation: it’s when the prices of things we buy go up, and our money buys less than before.

What is a stock and how does the stock market work?

Through social media, kids are now exposed to the stock market more than ever. So, expect to field some questions about how stocks and the market in general works. This question is perhaps the hardest to answer, given that nearly 40% of Americans have never even invested in the market.

If you’re a parent who doesn’t understand how the market works, let’s start with an explanation for you. 

A stock gives an investor an ownership stake in a business. Your ownership amount is calculated by multiplying the number of shares you own by the price of the stock.

Example: Say you own 10 shares of Apple stock, and the current price is $170.00. 

10 x 170 =1700

You own $1,700 worth of Apple.

The amount you own constantly fluctuates as other investors push the price up and down by buying and selling (supply and demand at work yet again).

Teach your kids to supercharge their savings with compound interest.

To explain it to a child, your definition will depend on their age, but it’s best to stick to a rudimentary level. 

One example is to compare buying stocks to buying a piece of a pizza. If you have a whole pizza, you own the entire thing. But if you split it into eight slices and give one slice away, then you only own seven-eighths of the pizza.

This is similar to how stocks work – companies divide themselves into smaller pieces (shares), and investors can buy or sell those shares, thus affecting their ownership of the company.

It’s important for parents to teach their children about investing in the stock market because it’s a key component of building wealth and financial stability. By starting early and understanding how it works, children can learn valuable lessons about saving, risk management, and prudent decision-making.

Final word

Children quickly grow curious about money and the vital role it plays in their lives. Providing clear answers to their questions can enhance their financial comprehension and foster healthy money practices from a young age. It can also help parents learn more about the fundamentals of personal finance.