It happens to almost every parent. You're driving the car or sitting at the dinner table, and your child asks a question about money that stops you in your tracks. Whether they're asking why you can't just buy more toys or why a friend has a bigger house, it's normal to feel a little panic, but these moments are actually incredible opportunities to empower them for life.
How and where do you get our money?
To a younger child, it often looks like parents have an endless reserve of cash. Eventually, they'll get curious about the source.
This is a vital teaching moment. It's important to explain that money doesn't grow on trees. You can explain that you receive a certain amount from work every week or every other week, and that limited amount is what the family must live on until the next paycheck arrives.
This introduces the concept of limited resources. It might also help them realize that going to work isn't just a choice you make for fun, but a necessity to support the family.
Can't you get more money at the bank?
To a child, an ATM looks like a free money machine. You push a few buttons, and cash appears. The same applies to credit cards and mobile payments because the transaction is so invisible.
When it becomes too easy to spend, it's hard for kids to understand intentional spending. Children, especially young ones, struggle to grasp that the supply is finite. Here is a great way to teach them about scarcity.
Put seven one-dollar bills in a jar or piggy bank. Take out $1 daily for a week. When they ask where the dollar is going, tell them it pays for a specific bill. You can get creative with this:
"This dollar will pay your weekly cookie bill."
That usually resonates better than saying it's for the electric bill. Seeing the "account" dwindle every day helps them understand what it's like to have money diminish. To take it a step further, replenish their bank with a fresh $7 at the beginning of the following week. This creates a revolving account, which also helps reinforce where money comes from.
Why do we have less money than my friends?
Teenage years are often spent comparing ourselves to others, and parents usually bear the brunt of this angst.
It might be the fancy car down the street or a friend's recent European ski trip. As kids mature, they observe what they don't have. This sparks questions about how your family stacks up financially.
You don't have to tell your kids the exact amount you make. Whatever you share will likely sound like a huge number to them anyway. What's important is explaining that different families have different goals. Perception isn't always reality.
For example, one family might have generational wealth, while another is buried in debt but acts like they have money trees in the backyard. Other families simply have different priorities. One might spend heavily on vacations, while others focus on saving for college or retirement.
You just never know. It's important to teach children that comparisons aren't always fair or accurate. Focusing on their own goals and values is what matters most.
Why are some things more expensive than others?
Aside from perceived value, products are priced according to supply and demand. Explaining this to a child can be tricky, so try this approach.
Pick a popular product that releases a new version every year, like skin care products or video games. Ask your child why they think the latest line or edition costs more than last year's version. They might guess that people want the new one the most. That "want" is demand.
Then, explain that supply determines the price based on that demand. Suppose you are one of 100 people who got an advanced copy of next year's version of Madden NFL. If you sold it online, you could likely make a profit because the supply of 100 is so limited. The smaller the supply, the higher the price, and vice versa.
Why do some jobs pay more than others?
The law of supply and demand affects salaries, too. Industries with high demand typically pay more, especially for employees with rare skills.
Take an Oral and Maxillofacial Surgeon as an example. According to the US Bureau of Labor Statistics, 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. The "supply" is low, so top salaries are required to attract the best talent.
Why do other careers pay lower wages? It's simple. The supply is much bigger because there are more qualified candidates. According to the US Bureau of Labor Statistics, retail salespersons rank as one of the most popular occupations, with nearly 3.7 million employed as of May 2023.
Since there are many stores and an abundant supply of workers with low-entry requirements, stores don't have to pay top dollar. Unsurprisingly, retail workers make an average salary of about $35,000.
What is inflation?
Inflation has been a hot topic, so you might get questions about it. At its core, inflation represents an increase in the overall cost of goods and services. In the US, we often use the Consumer Price Index (CPI) to measure this.
Some inflation is normal and indicates a growing economy. However, it becomes an issue when demand grows faster than production, or when companies pass rising internal costs to consumers.
Here's how to explain it to a kid: Imagine you have a piggy bank. Last year, you could buy five chocolate bars with the money inside. But this year, when you take that same amount to the store, you can only buy four chocolate bars.
Even though you have the same amount of money, things in the store have become more expensive, so your money doesn't buy as much as it used to.
What is a stock and how does the market work?
Kids are exposed to the stock market through social media more than ever. This can be the hardest question to answer, especially since nearly 40% of Americans have never invested in the market, according to a 2023 Gallup poll.
A stock gives an investor an ownership stake in a business. Your ownership amount is your number of shares multiplied by the price.
Example: Say you own 10 shares of Company X stock, and the current price is $100.00.
- 10 x 100 = 1,000
You own $1,000 worth of Company X. This amount fluctuates as buying and selling pushes the price up and down.
To explain this to a child, use a pizza analogy. If you have a whole pizza, you own the entire thing. If you split it into eight slices and give one away, you only own seven-eighths of the pizza. Stocks work the same way. Companies divide themselves into smaller pieces (shares), and investors buy or sell those shares to own a piece of the company.
Teaching this early helps children understand that investing is a key component of building wealth, allowing them to learn about risk and prudent decision-making.
The Facet difference
We believe that financial health is about more than just numbers in a spreadsheet. It's about how your money supports the life you want to live. That’s why at Facet, you work with a team of CFP® professionals who look at your entire financial life, from your investments to your family's future goals.
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