As a kid, you might think that your parents will give you money to buy your favorite games, clothes, food, and movies for the rest of your life. Wrong! Everyone needs to learn about how money works, including kids. You’re too young to worry about things like mortgages and student loans. But you can still learn about how they work so that you can be the smart kid when it comes to money matters.
Needs and Wants
Your parents may constantly tell you that you don’t “need” those tickets to the Shawn Mendes concert or that pair of sneakers that your favorite basketball player wears. The concert tickets and the basketball sneakers function as “wants” because you don’t need Shawn Mendes or Jordans to survive. Everything else besides clothes, food, water, and shelter and the money to buy these things are “wants”.
Your parents probably allow you to buy a few “wants” with your allowance. They may even buy some of your more expensive “wants” for you. That’s okay. Everyone should have a couple of luxuries in their life. In an ideal world, the luxuries that a person has will depend on what they could afford. If an adult has $900 for the new iPhone, they should have it. That goes for kids: if you save most of your allowance to buy those sweet Jordans or those Shawn Mendes tickets, more power to you.
If your parents won’t buy you concert tickets or sneakers, ask them if you can do extra chores around the house. After all, your parents probably have to go to work every day in order to buy things. You don’t have to get a full-time job, but you could mow a lawn or walk the family dog a little more often.
What Is Interest?
Your parents probably have to make monthly payments for your house. That’s called a mortgage. If you have siblings or cousins who go to college, they may have to pay back what is known as “student loans”, money that helps them pay for tuition. The adults in your life may also make payments for their cars, called “car loans”.
When the adults in your life agree on making these payments, they make an agreement with the lending institution to not only pay back the loan amount. They also agree to pay back something called “interest”. Adults have to pay interest so they can use other people’s money to pay for the things they need. In other words, your parents may pay extra money on top of the price of their house, for example.
Because of interest payments, purchases such as cars and houses can become a lot more expensive if an adult isn’t careful. That’s because the interest that an adult will have to pay will increase if they don’t make payments on time or miss them altogether.
Let’s take something that you as a kid probably owns: a cell phone. Many mobile companies offer customers the chance to get the latest phone by allowing them to make monthly payments rather than paying $800 – $900 upfront for the hot new phone. If you decide to make monthly payments on that iPhone, the mobile company will charge you the price of the phone as well as interest. That makes the phone more expensive. However, if you save your money until you have enough for the phone that you want (or buy a cheaper phone), you can avoid the interest charges altogether.
Another example that is helpful for kids to understand is how they will pay for college using student loans. When they borrow the money needed for college from either the government or private banks, they will be required to pay interest on top of that loan. They could be paying that extra money (interest) for 20 years or more.
Sometimes adults can’t avoid paying interest on major purchases. These purchases can include student loans and mortgage payments. The key to avoiding trouble as an adult is to practice financial responsibility by spending less money than you earn, paying your bills on time, and not spending money you don’t have.