A Kid’s Guide to Understanding Business and Money
As you get older, you start to want things that your parents are not always going to be able to provide. For example, the new video game system you want costs $300 your parents don't have, which leaves you to fend for yourself. Earning money allows you to buy the things you want, and it also teaches you a sense of responsibility. You can either get a part-time job to earn money, or you can start doing chores for neighbors and family members for cash. In order to get paid, you have to be responsible enough to do the tasks you have been asked to do. Once you have earned your money, you can save it for your future and even spend a little to get the things you want.
- Kids and Money (PDF)
When kids start getting into the working world, they will hear terms such as "income" and "wages." Some people use these terms like they mean the same thing, but they are actually different. Income is the total of the money you make for a specific period. For example, banks may ask you for your weekly or monthly income when you are applying for a loan. Your wages are how much money you make per hour.
Kids hear their parents talk about paying taxes all of the time, but many parents do not take the time to explain what taxes are. Government at the local, state, and federal levels needs tax money to be able to offer services to the people and conduct government business. Taxes are a percentage of income that is taken to pay for keeping the government running. For example, federal income tax is a percentage of the money you make every year that is paid to the federal government. Many states also have an income tax that people pay. Sales tax is a percentage set by the state and county governments on the purchase of most goods and services. For example, if you buy a car for $10,000 and the state and county sales tax rate together is 10 percent, then you pay $1,000 in taxes on the purchase of the car. Sales tax is added onto the purchase price and increases how much you pay for whatever you are buying.
Earnings statements (also called income statements) can show exactly where an account, company, or individual got their money from. Retirement plans send out detailed earnings statements every quarter to show which investment accounts made money and which accounts lost money. This helps the individual to make decisions about whether or not to make changes to their account or leave their account the way it is. Banks send out earnings statements on accounts that gather interest, such as savings accounts, money market accounts, and certificates of deposit.
Companies that people can own part of by buying stock in them are called public companies, and they are required to release annual earning statements so that prospective investors can see how the small business makes money. A business income statement will show how much the company made or lost. When a company subtracts its expenses from its revenue and it gets a positive number, then that is profit. If the number that is left over is negative, then that number indicates losses.
One of the best ways to safely save and use money is with a bank checking or savings account. A savings account usually has a small investing part to it that will add a little interest income to your money. Investing is the process of taking money and giving it to a company or some type of investment fund in the hopes that they will use it to make more money, some of which they will give to you. Sometimes investments make money, and sometimes they lose money. A bank will usually make safe investments with its savings accounts to try to make a little money for its customers every month.
To spend money without actually using dollar bills, you can use a bank checking account. It is important to always have enough money in your checking account to cover the amounts of the checks you write. When you fill out a paper check, you write in who you are paying on the line that says "pay to the order of," then you write the amount in the box next to that line, then you write out the amount in words and fractions on the line below it. You write out the dollars in words and the cents as a fraction. You must sign the check on the line in the bottom right-hand corner for the recipient to be able to cash it.
The earlier kids learn saving, budgeting, and investing skills, the sooner they will understand the value of money. When it comes to being able to save money, the simple rule is to only buy what you need and never spend more than you have. You should set up a monthly budget and make putting money into your savings account part of that budget. A budget is a plan for how you will divide up and use your money. When you make putting money into your savings account one of your monthly bills, then you will always have extra money to buy the things you want.
One way to increase how much money you have each month is to learn how to invest. You can get an adult to set up an online account and let you help them invest in stocks to start learning about the stock market and how you can use it to make money. You can also find investments at your local bank that include your savings account, a certificate of deposit, and a money market account.
- How Do I Create a Budget?
- How to Save Money Even When it Feels Impossible
- The Best Ways to Invest $5,000
If you want to explore the idea of making money on your own, then you should consider starting your own business. A kid can learn a lot about the world by starting their own business and understanding the importance of responsibility. You should never start your own business without the help of an adult, and if you are setting up a real, grown-up business (not just something like a lemonade stand or babysitting) and you are still a kid, you might need to register your business with the local government and start a business bank account. Once you have your business registered and your account in place, you can start to find your first customers.
Running a business is hard work, and it can teach a child responsibility and respect. When you run a business, you need to keep track of all of the money you spend and all of the money you make, and you need to pay attention to the needs of your clients.
When you're running your business, you'll need to use a lot of the math you learned in school, including business algebra. You'll use algebra to figure out things like how much to pay and collect for taxes and how much you should charge for what you're selling. You'll also need to know basic math, of course, like how to add up money and make change for customers. Good thing you paid attention in math class!
Image courtesy of junpinzon / Freedigitalphotos.net