The ABCs of Money for Kids: F Through J

Making personal finance terms easy for kids to understand

joint account, good investment, fixed income, household income, interest

The Balance / Aeri Wittenbourgh

Are you looking for ways to help your kids or students learn more about all things money? That’s why we’ve created the ABCs of personal finance for kids. Our kid-friendly explanations of the following financial terms can help break down confusing topics while helping kids feel confident that financial literacy is very possible—even at a young age.

Fixed Income Investment

If you have some money you don’t need to spend any time soon—say you saved it up from your bonuses and side gigs—you can lend it out in what’s called a “fixed income investment.” In return, the borrower will pay you back what they owe you and more through regularly scheduled payments. The payments can happen one time a year, twice a year, or every month.

For example, say you have $1,000 and you lend it to the government through a bond. The bond is a loan that pays you 7% per year for 30 years. That means every year for 30 years, you would receive $70. After 30 years, you’d also get your $1,000 back.

You may hear words such as “bonds,” “Treasury securities,” “certificates of deposit,” “money market funds,” and “annuities.” These are all different types of fixed-income investments. Many people like them because you can earn a set amount of money on a set schedule.

Why Is This Term Important?

Fixed-income investments are important because they can help your child earn money without taking big risks. If your children learn the value of investing in fixed income when they’re young, they can receive payments regularly on top of what they earn once they start working. That can give them more money for the things they want and need. Also, since fixed-income investments play a key part in retirement, teaching your kids about fixed income now can help them in the future when they formulate long-term financial plans.

Good Investment

When you invest, you give your money to someone with the hopes of getting more money back. A good investment will help you make more money, while a bad one won’t—and can even make you lose the money you started with.

For example, say you have two friends and you lend them both $200 under the condition that they pay you back $220 within one week. One friend pays you back the $220 within two days. The other doesn’t pay you back anything and says he never will. The first loan turned out to be a good investment, while the second one was a bad investment.

If you want to make an investment, it’s important to think about how likely it is that you’ll get your money back, any risks you’ll face, and how much you can earn. Using the above example, you probably wouldn’t lend to the second friend because it’s too risky. However, you might lend even more money to the first friend because they paid you back really fast.

Why Is This Term Important?

All investments are not the same, and that’s a principle children should understand. Some investments offer the chance to get more money back but have more risk. Other investments offer less money back but have a very low risk of losing money. As you talk to your kids about good and bad investments, consider talking to them about the metrics and factors you consider when you’re making an investment decision.

Remind your child of the role diversification and risk play in good and bad investments. Many people split up their money between investments that are riskier and less risky; this is called “diversification.” That way, they can make sure they don’t lose all their money and have a chance to earn larger amounts, too.

Household Income

Household income is the total amount of money made by all the people who live together in one house. Household income is an important number for people who file taxes.

For example, if you and your spouse live together, your household income would be the total of all the money you and your spouse earn. If you are a single parent or guardian, then the household income would just be the money you earn.

Once you make a certain amount of money, the government requires you to file a tax return, even if you are under age 18. For example, if your child is 10 and makes at least $12,550, they would need to file taxes, and their income would count toward your household income.

Why Is This Term Important?

Household income might be used in a few ways as your child grows into a teenager and adult. If they want to get a loan to buy a house, the lender will usually look at your child’s household income to figure out if they make enough money to buy a house. The amount their household makes will also decide the cost of the house they can afford.

A good way to talk to your children about household income is through the lens of how the government looks at household income. In many cases, the government uses household income to decide if it can help people pay for basic things such as health care insurance, college, and even food. The higher a person’s household income, the more they can typically borrow, and the less federal financial help they’ll be eligible for.

Interest

Interest can help you earn money, but it can also cost you money. How can it do both? Here’s how it works.

If you borrow money, the person or bank giving it to you will usually make you pay back more than you borrow. For example, say you asked your friend for $1,000. If they lend you the $1,000 but charge you 10% interest, you would pay an extra $100 to borrow the money (10% of $1,000 is $100). Interest is the cost you have to pay to borrow money shown as a percentage.

Now imagine you have the $1,000. If a friend wants to borrow it from you, you could charge them 10% in interest. You will get your money back plus an extra $100. You can earn interest by lending your money to people and by putting it into accounts that pay interest, such as a savings or investment account.

You can start earning interest on the money you get from side jobs, for example, if you open up an investment or savings account. Some accounts even let you earn interest on the interest (known as “compound interest”), which can really add up over time. The younger you are when you start earning interest, the more time it will have to grow.

Some interest rates are fixed, so they stay the same, while some can move higher or lower over time.

Why Is This Term Important? 

Teaching kids about interest can help them learn one of the most important principles in borrowing and investing. It’s also important for them to know that borrowing money is not usually free—unless you have a really nice family member or friend who does you a favor. Remind your child that when they turn 18, they’ll get credit card and loan offers that sound good, but the money sometimes comes at a cost. They’ll have to pay it back, often with interest, so it’s good to know how it works.

Joint Account

When two people want to share money, they can open a joint bank account. It’s one account that both can use.

For example, if you wanted a bank account both you and your partner could access, you could open one with your partner. You would each be able to add and spend money when you wanted.

People most often use joint accounts with their husband or wife, family members, or business partners.

Why Is This Term Important?

Joint accounts can come in handy for your child in the event you want to share money with them via a bank account. As they get older, they may decide to open a joint account with a spouse or partner. But if they do, it’s important they know that the person they open the account with needs to be trustworthy, since either person can spend the money without the other’s permission.

Article Sources

  1. Department of the Treasury. "Fixed Income."

  2. IRS. "Tax Year 2021 1040 (and 1040-SR)," Page 11.