May 9, 2023
Children form financial habits as early as ages 7 to 9, according to the National Financial Educators Council.1 However, their curiosity about money and how the economy works often starts even before that.
Questions about the role of money in our lives can bring a panicked expression to the faces of some parents. They’re concepts that seem too complicated to explain or that you may not be entirely sure of yourself. Here are 10 common questions children are likely to ask you about finances—and some ideas on how to answer them like a pro.
KEY TAKEAWAYS
- Younger children, still learning the idea of money as a limited resource, are more likely to ask questions about why you can’t always just get more at the bank.
- As kids get older and ask about the price of various items, parents can introduce the basic concept of supply and demand.
- Teenagers are typically ready for more advanced financial concepts, such as how stocks work and the ways that people invest.
Young Kids (Ages 9 and Younger)
1. Where does our money come from?
For younger children, it can seem like Mom and Dad have an infinite supply of cash. At some point, they’re going to wonder where you actually get that money.
You can use that question as an opportunity to talk about the fact that you get paid a certain amount each month for the work that you do at your job. They may be too young to understand the concept of taking out loans, so you can explain the basic idea that you can only spend as much as you’re paid for your job. This introduces the crucial concept that money is a finite resource—and it may just help them understand that you leaving to go to work isn’t exactly a choice.
2. Why can’t you just go to the bank and get more?
If your little ones have ever seen you withdraw money from an ATM, it’s easy for them to conceive of a magical machine that spits out as much money as you want. If only it were that simple.
The idea that your supply of money is limited isn’t necessarily intuitive, especially for younger children. So the next time you’re at the bank or an automated teller machine, point out that there’s a certain amount in your account, and you have less money in that account every time you get cash. Their piggy bank can be a useful reference point. If you start with $5 in it, you can take out $1 per day, but you’ll have less money in the bank each time. By day five, Wilbur will be empty.
Explain then that it’s the same for parents. There are a lot of important expenses eating away at your bank balance—from clothes and food to heating bills—so you have to be careful about not spending too much on other things.
3. How much does something cost?
If you have a smaller child who continually nags you to buy their favorite snack or toy at the store, it may be because they have zero idea how much anything actually costs. So if they recently got an allowance or received some cash for their birthday, let them bring part of it on your next trip. Tell them they can get whatever they want for that $10 or $20, but they can’t go over.
Pretty soon, they’ll be paying close attention to those price tags and getting a sense of how far a dollar goes—or doesn’t go. They’ll also learn to distinguish between what they really want and what they can do without.
4. How much money do we have?
Whether prompted by the enormous house on the other side of town or the island vacation that their friend just took, kids naturally start noticing what they do or don’t have. That eventually leads to questions about how you compare with other families when it comes to finances.
Obviously, you don’t have to give your kids the exact amount you make every year—whatever you say will probably sound like a lot. However, depending on your slot in the socioeconomic spectrum, you can use those questions to both reassure them and temper their expectations about spending money on toys and other nonessentials.
For example, a middle-class parent can say that they make a pretty typical salary compared with other parents in their area. It’s enough to take care of the important things you need, but it’s not so much that you can afford every want that creeps into your head.
Preteens (Ages 10 to 12)
5. Why do things cost what they do?
Kids will notice that a pack of ballpoint pens costs around $2, but a 4K television will set you back $1,000. So who decides those prices, exactly?
To demystify that phenomenon, you’ll have to get into the basics of the law of supply and demand. You can use video games as an example. Ask your kids why the latest edition of a popular Xbox game might cost $60, whereas last year’s version can be had for $40. They may guess that players want the new one more. The companies selling those games, wanting to make a profit, know that and demand more money for the new edition. This is demand at work.
Likewise, the amount of a certain item that’s available—that is, the supply—will have a lot to do with how much you pay. If you just bought the last copy of a popular video game at the store, you can probably go outside and sell it for more than you paid for it. Limited supply pushes up prices, and an extensive supply does the opposite.
So what about that $2 pack of pens and the expensive TV? There are tons of pens on the market from any number of makers, and people aren’t willing to spend that much for a ballpoint. Televisions cost more to make, so there are fewer of them on the market, and customers are willing to pay for the really good ones.
6. Why do some jobs pay more than others?
Just as the law of supply and demand influences the cost of things, whether it’s a car or a cupcake, it also influences how much companies are willing to pay different employees. Working in an in-demand field is likely to result in a higher wage, as is operating in a field with little supply.
That’s why the median pay for a physician, who has to go through many additional years of school after college, is $208,000 a year, according to the U.S. Bureau of Labor Statistics (BLS).2 In the grand scheme of things, there just aren’t that many people who can perform that job.
The average information systems manager, who must have both technical know-how and supervisory skills, makes about $159,010.3 These are much-needed jobs, and there aren’t that many people qualified to perform them, so companies have to offer a good salary to attract new workers.
What about cashiers? Businesses need a lot of them, too. However, there are many more people qualified to do that work, so the supply is (relatively speaking) abundant. The job doesn’t require extensive math skills or experience, so stores don’t have to pay nearly as much to bring in new workers. Perhaps it’s no surprise, then, that cashiers make a median salary of just $27,260, based on BLS data.4
TIP: Once your kids understand supply and demand, you can discuss why some jobs have different salaries because of the social status associated with them, regardless of their importance, as well as the difference between private and public sector jobs. Sanitation workers, for example, are a vital part of keeping communities clean, functioning, and healthy. But because they are public sector jobs requiring little specialized training and are often invisible to the general population, they pay only an average of $30,320 per year.5
7. How do banks make money?
This one can turn into a can of worms, so it’s best to keep things simple for younger children. Explain that banks hold on to the money that customers put into an account, but they use some of that money to make loans to other customers, whether to buy a house, purchase a car, or start a business. When people pay back those loans, they have to pay more than they borrowed—and that, of course, is interest.
The reality is a whole lot more complicated. Even smaller banks also make money by charging fees on everything from checking accounts to mutual fund purchases. And Wall Street banks generate revenue by underwriting stock and bond issues and trading securities, among other activities. So tailor your answer based on the age and knowledge level of your child.
Teenagers (Ages 13 to 19)
8. How do stocks work?
By the time your kids reach junior or senior high school, they’ve no doubt heard about a particular company’s stock either skyrocketing in price or crashing and burning after a meteoric rise. Still, what a stock actually is and how to invest may remain elusive.
The simple answer is that companies sell an ownership stake to ordinary people—and to some institutions—to raise money. For simplicity’s sake, say a company divides its ownership into 100 pieces, or shares. Each share that you buy entitles you to one one-hundredth of the business’ assets and profits.
As a company makes more money, or looks like it’s about to, that ownership stake becomes more attractive to people. Naturally, the price goes up. History suggests that if you buy enough shares of a whole gamut of different companies—including ones in different industries or even in different companies—you’ll usually come out ahead in the long run. Of course, it’s important to explain that share prices can go the other way as well. Indeed, they can fluctuate a whole lot, especially if there’s a lot of interest in that company.
One of the best ways to teach about the potential risks, as well as the rewards, of a stock is by using a hands-on approach. For example, you and your child can open up an account together on Investopedia’s Stock Market Simulator, which lets you trade shares of actual companies with virtual money. Have your teen pick one or two companies that they know, such as Apple or Tesla, and try to figure out why the share prices move in one direction or the other over time. By the time they’re investing for real, they’ll have a better idea of what they’re getting into.
9. How much money can you live on?
As kids inch closer to life as independent adults, they typically develop a curiosity about what they’re in for. In no small part, that means getting a better idea of how much money it takes to fly the coop.
According to BLS data from 2021, the average adult under age 25 spent $42,063 a year when adding up housing, food, entertainment, and an array of other expenses (the amount only increases as the age goes up).6 The price of shelter and other essentials will vary considerably based on where you live, so you may have to adjust that figure up or down accordingly.
The mean annual expenditure of $42,063 is almost a $4,000 jump from the 2020 average of $38,070.7 If your child is interested, you can discuss things like inflation, rising rent prices, or global events that affect prices of food, housing, healthcare, and more.
Can those numbers be a little terrifying? Sure, but a little context might provide the motivation they need to learn about budgeting, investing, and finding a job.
10. What causes inflation?
It may be adults feeling the brunt of higher gas prices and grocery bills in recent months, but even teens are likely to have heard about the bogeyman called inflation. So what is it, exactly, and what does it mean?
In its simplest terms, inflation means that we’re paying more for the sum total of all the goods and services that we buy. There are several ways to measure that, although perhaps the most common in the United States is the Consumer Price Index (CPI). The CPI is a weighted average of the price of a basket of consumer goods and services, including transportation, food, and healthcare.8 When that average goes up from one month to the next, you have inflation.
Typically, there’s some inflation when the economy is growing. However, the rate can increase when demand for certain goods and services grows faster than production can ramp up, as has happened due to supply chain problems during the COVID-19 pandemic.9 It can also happen when companies face increased costs of their own that they pass on to consumers. For instance, a construction company might have trouble getting hold of lumber after a spate of bad forest fires, leading them to raise the price of new homes. Similarly, a drought may decrease the supply of grapes, forcing grocery stores (and consumers) to pay more for the fruit.
That can certainly lead to short-term pain, as you’re paying more for the things you buy. But in the long run, inflation also eats away at the value of your cash. If inflation averages 6% a year, for example, then $1 would be worth only 75 cents five years from now.
What Affects the Price of a Particular Item?
In a market-based economy, the law of supply and demand dictates pricing. When the demand from consumers (or businesses) goes up, suppliers can get away with charging more. Likewise, if the supply of a given item is limited, the price is likely to go up, and vice versa.
How Do Banks Make Money?
Banks may engage in any number of activities that generate revenue. However, the primary way that most banks make money is by lending it to customers and charging interest in return. By receiving a higher rate of interest than they pay on deposits, they’re able to make a profit.
What Is a Stock?
A stock is an ownership stake in a business. The amount of ownership that you have is proportional to the number of shares that the company has sold and how many shares you own. When companies are expected to generate increased profits in the future, the value of those shares on the open market will often ruse, providing a profit for those investors who sell them. The opposite is also true.
The Bottom Line
It doesn’t take long for kids to develop a curiosity about money and its important role in your life and theirs. Having a clear answer to their questions will help them better understand finances and allow them to develop good money habits at an early age. Preparing to answer their questions can also help you think about the basics of budgeting, investing, and work—which may benefit your entire family.
This article was originally published in Investopedia on May 9, 2023, and written by Daniel Kurt.
1. https://www.investopedia.com/questions-kids-ask-about-money-5217244
2. Image courtesy of iStock
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Article Sources
1. National Financial Educators Council. “Kids Financial Literacy: Comprehensive Financial Education Program for Kids — Resources for Parents, Educators, Third-party Providers.”
2. U.S. Bureau of Labor Statistics. “Occupational Outlook Handbook: Physicians and Surgeons: Summary.”
3. U.S. Bureau of Labor Statistics. “Occupational Outlook Handbook: Computer and Information Systems Managers: Summary.”
4. U.S. Bureau of Labor Statistics. “Occupational Outlook Handbook: Cashiers: Summary.”
5. U.S. Bureau of Labor Statistics. “Occupational Outlook Handbook: Hand Laborers and Material Movers: Summary.”
6. U.S. Bureau of Labor Statistics. “Table 1300. Age of Reference Person: Annual Expenditure Means, Shares, Standard Errors, and Coefficients of Variation, Consumer Expenditure Surveys, 2021,” Page 1.
7. U.S. Bureau of Labor Statistics. “Table 1300. Age of Reference Person: Annual Expenditure Means, Shares, Standard Errors, and Coefficients of Variation, Consumer Expenditure Surveys, 2020,” Page 1.
8. U.S. Bureau of Labor Statistics. “Consumer Price Index.”
9. Federal Reserve Bank of Cleveland. “COVID-19 and Supply Chains: A Year of Evolving Disruption.”
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