Table of Contents
Table of Contents

The ABCs of Money for Kids: K through O

5 Financial Terms Your Child Should Know

kiddie tax, lease, mortgage, online bill pay, NFT

The Balance / Aeri Wittenbourgh

Providing a financial education to young people is one of the best ways to set them up for financial success later in life, and parents and guardians can play a big part in that. To get you started, basic definitions of essential money words are key. 

Here are some of the ABCs of money to make it easy to start introducing these important topics to children early in life.

Kiddie Tax

The kiddie tax is a rule for how the unearned income of children is taxed. Of course as children, kids don’t typically earn income from work or an employer as their parents do. Unearned income in this case includes interest, dividends, and other investment income. It generally applies to investment income in a child’s custodial account, which is a type of account that a parent or another adult can open on behalf of a child. 

The purpose of this tax is to prevent people from avoiding paying taxes on their investments by purchasing them in their children's accounts instead of their own.

Under the kiddie tax, the first $1,100 of a child’s unearned income is tax-free. The next $1,100 is taxed at the child’s marginal tax rate, which is likely to be lower than their parents’ rate. Finally, any unearned income above $2,200 is taxed at their parents’ tax rate.

Why Is This Term Important? 

By opening an investment account for your child, you can start growing their wealth from a young age. But if you’re going to open an investment account for your child—whether to grow their savings or as a way to teach them about investing—it’s important to understand the tax consequences. The kiddie tax will eat into your child’s investment returns. 

If you plan to use their custodial account as a way to teach them about investing, then you should also take this opportunity to teach them about the tax consequences, too.

Lease

A lease is essentially a contract between a person who owns a piece of property or land and someone who wants to use that property or land. The lease serves as an agreement that the property at hand will be used by the renter for a specific period of time. 

If you rent an apartment or a home from someone else, you will likely sign a lease. Similarly, many people choose to lease a car rather than buy their own. Each lease contract will say how long the agreement will last and the amount the user must pay the property owner each month.

Leases are typically used for agreements that last a year or more.

Why Is This Term Important? 

Where you live and how you get around are the two biggest expenses in most people’s budgets. In 2020, just those two expenses—housing and transportation—made up a combined 50.9% of the average family’s total expenses. They are also the parts of your budget where you’re most likely to have a lease.

This means that your children are likely to sign a lease in some way, shape, or form when they reach adulthood. Making sure they know what to expect from this contractual agreement and what alternatives are available when they are young is a great way to build a foundation. 

Whether you rent or own your home or car, you can use these two properties as examples when discussing how a lease works with your kids. If you do lease a house or car, you can show your child the physical or digital copy of the lease to help them better understand the rules involved with the contract, as each lease varies.

Mortgage

A mortgage is the type of loan—or method of borrowing—that you use to buy a home. Most people can’t afford to buy a home in cash, meaning they have to borrow money from a bank. And the mortgage is the specific type of agreement between the bank and the homebuyer that makes it possible for a person to buy a home.

Each month you make a mortgage payment to your bank. Mortgages come in many shapes and sizes, but most last for 30 years and have a fixed interest rate, meaning you pay the same amount each month for your entire mortgage. And if you stop paying on your mortgage, the bank has the right to take your home (known as foreclosure).

Why Is This Term Important? 

For most people, a home is the largest purchase they’ll make in their lives, and a mortgage is the longest loan contact most people will sign. When it comes time to make the decision to either rent or buy a home, it’s important to understand how mortgages work, the requirements to qualify for one, and the huge commitment you’re making.

NFT

An NFT—or non-fungible token—is a digital asset that represents a real-world item, like music or art. When something is non-fungible, it means it can’t be replaced or replicated. And the term token is used to describe something’s digital nature.

An NFT can represent just about anything, but they’re often made to represent art, music, collectibles, and more. NFTs have created a way for artists to make money from their work without going through the traditional platforms like streaming services in the case of music or a storefront in the case of art. Even a tweet can be made into an NFT. Former Twitter CEO Jack Dorsey famously sold his first tweet as an NFT with a price tag of $2.9 million.

What’s unique about NFTs is that one person’s ownership doesn’t necessarily prevent others from enjoying the asset. For example, Jack Dorsey’s first tweet is still available on Twitter for anyone to view. However, only blockchain technology, which is how NFTs are bought and sold, maintains the records of who actually owns the asset.

Why Is This Term Important? 

As of March 2022, NFTs are still quite new to the investment world, and most people still haven’t dipped their toes into them. But based on their rapid growth since 2020, it seems likely that NFTs will only grow in popularity and importance. Whether you enter the NFT world as an artist or an investor, it’s likely you and your kids will come across NFTs at some point.

Online Bill Pay

Online bill pay is a service that allows you to pay your bills online rather than sending a check or paying in cash. In some cases, online bill pay may be a service that your bank offers, where you can schedule payments to all of your providers directly from your bank account. 

In other cases, you might set up online payments directly with the business owner or service provider. For example, your cell phone provider likely allows you to set up automatic online payments, and they’ll simply take the money directly from your bank account each month.

Why Is This Term Important? 

Paying bills is one of the most important and essential tasks of managing your own money. In an increasingly digital world, online bill pay is becoming the most popular—and in some cases, the only—option for paying bills. It’s more convenient than paying by check, and since it’s often automatic, it helps to ensure you’ll never miss a payment.

Article Sources