Parents and teachers who want kids to be able to use money well turn to personal finance to learn all the ways that money works in our world. Understanding how we earn, save, spend, and share money helps us to make good choices. Getting started in the world of personal finance can seem like a lot, even as adults, but when we break it down into smaller pieces, it’s easier to learn. Here are some of the ABCs of money that can help you start great conversations about money with kids.
APR
APR is an abbreviation for “annual percentage rate,” and it’s the cost of borrowing money from a place like a bank. Most of the time, APR isn’t something you pay just once. Instead, you could pay APR every month. APR is important because it’s a number that helps you decide who you should borrow money from. If Bank 1 has a 10% APR but Bank 2 has a 20% APR, it will be cheaper to borrow from Bank 1.
Why Is This Term Important?
Understanding how money flows through banks, going in as savings and coming out as loans, helps kids to see why saving matters. When they need a loan to make a big purchase, knowing the basics of APR can help them understand that borrowing money to pay for something makes it more expensive than what they pay to buy it and take it home.
Banking
Banking is what you do when you give, spend and borrow money with a bank. Banks are companies that keep, lend, and work with money. For instance, they let you and your parents borrow money and make you pay a little bit extra, called interest, as you pay them back. When you save your money with them, use that money to buy things, or borrow money from banks, it’s called “banking.” Banks also store your money for you and let you use the money to buy things. But instead of going to the bank to get money so you can buy stuff, the bank gives you a plastic card called a “debit card” you can use to pay for things. The plastic card is linked to the money the bank is saving for you—this is also known as your “account.” Whenever you use the card, the bank knows and subtracts what you spent from your account. Sometimes the bank will pay you interest to let them save your money with them. Interest the bank pays you is like a little gift to say thanks for letting them store your money. By taking money from some folks and giving money to others, the bank helps everyone do what they want to do right now with money. There are even different kinds of banks, from big ones that work all over the world to small ones just in your town.
Why Is This Term Important?
Banks will have a growing part to play as kids grow up, but understanding what they do can be a little daunting, especially since they use a lot of special banking words. Knowing that they are companies who give people a place to put their money and earn interest as well as a place that people can go to get a loan and pay interest can help them start to see the role of a bank in their own financial future.
Credit Score
Banks only have so much money to lend to people at a time, and a lot of people want to borrow money to buy things like cars and houses. How can they decide who to lend that money to? One way is with a credit score, which is a score that shows banks how risky it is to lend money to you. Credit scores go up when you do things that lenders like to see, like paying your bills on time if you have a loan or a credit card. They go down when you don’t pay back a loan or pay it back late. Think about it like grades at school: If someone got an A on a math test while another person got a D, who would you want to ask to help you with math? Probably the person who got the A. When lenders see a high credit score they think, “That’s someone who will definitely pay us back the money they owe!” When they see someone with a low credit score, they wonder if the person will be able to pay them back. Low credit scores don’t mean that you can’t ever borrow money or that you’re not a good person—sometimes low credit scores happen because of bad luck—but it might mean banks will be a little worried to lend money to you. That might seem sad for people with low credit scores, but the good news is that just like the person who got a D on the math test can study and get a better grade next time, credit scores can go up. Paying bills on time and borrowing money that you can pay back are key parts of bringing that credit score up.
Why Is This Term Important?
Credit scores may seem like they wouldn’t matter to kids, but they can be a way to reinforce that financial choices matter, since decisions about credit cards and bill payment when they are younger create their habits going forward. If your teen is starting to pay bills like their own insurance for a car or debit card payments, even if their particular bills don’t influence their credit, they can see how paying on time is a habit that builds trustworthiness, which is a good lesson to learn early.
Deposit
Deposit is a money word for putting money into a bank. You can deposit money in a checking account so that you can spend that money with a debit card you use at stores and online, or with a check. You can also deposit money in a savings account while you save up for a big purchase. Depositing money at a bank lets the bank use that money to earn more money. Sometimes they invest it in the stock market, and other times they lend it to people who want to buy a house or car. They keep enough at the bank that, if you need it, you can take your money back, which is called a “withdrawal.”
Why Is This Term Important?
Big words like deposit and withdrawal can make banking seem more confusing than it has to be, so a clear understanding of what it means to trust a bank with your money can help kids understand the benefits of starting their first savings account.
Economy
If you’ve heard, “The economy is good right now” or “The economy is bad right now,” you might be a little confused—what is the economy anyway? The economy is three things: all the people making things, all the people using things, and all the buying and selling of those things. If one country doesn’t make very much and doesn’t sell very much, everyone has less stuff and less money—that’s why people see the economy as “bad” when not much is being made and sold. If you’ve heard someone say, “It’s hard to find a good job in this economy,” they may be talking about how there isn’t much being made and sold, so there are fewer places for them to work. The economy gets better when more people get jobs or start businesses and more people buy the things that people are selling. You are part of the economy if you choose to have a lemonade stand in the summer and then buy a new pair of flip-flops with the money you make. Part of what makes the economy complicated is that every country has an economy. If people in one country buy things that another country sells, that changes both economies. If people are talking about selling and buying all over the world, they may say they are talking about the global or worldwide economy.
Why Is This Term Important?
Even a basic definition of economy may be somewhat abstract to kids, but they will encounter this term in social studies and history lessons, so it helps to see how it matters. If their parents change their spending habits based on the wider economy, understanding that impact can make more sense if, for instance, a family has to cut back on spending or chooses to move to find a better job.
