The financial world is full of confusing terms. Some of them can cause adults to scratch their heads, let alone kids. But if your children are to learn about finance, understanding these terms is key. To help, here are 20 financial words your kids need to know—and how to explain them.
Related: Teaching kids about money
Top financial words to explain to kids:
- Compound interest
- Credit score
- Credit card
- Debit card
- Exchange rate
- Wants vs needs
- Stock market
APR stands for Annual Percentage Rate. This is the yearly cost of borrowing money. A credit card with a 19% APR will be cheaper to borrow money on than one with a 25.7% APR. (But always check the small print.)
A budget is a spending plan you make to keep track of your money. Budgets are based on income (like your allowance) and expenses (things you need to buy or services like Spotify or Netflix you pay for).
Show children how budgeting works with an allowance. Get them to divide their money each week into saving, giving, and spending. The ‘save’ money is for longer-term goals, ‘giving’ is for money they’ll send to their favorite charities, and what’s left over is available for spending.
Related: Budgeting for kids
3. Compound interest
Compound interest, also known as compounding, is when you earn interest (money) both on the money you save and the interest you earn.
To explain this:
- Give your child a piece of candy.
- Offer to give them an extra piece if they keep the first one uneaten all day. If by the next day they haven’t eaten the two pieces of candy, say you’ll double the amount they get the day after. So two pieces become four, and four become eight.
- See how long you can keep them going.
4. Credit score
A credit score is a 3-digit number based on your financial history. A higher credit score makes lenders more confident about letting you borrow money from them. Get children to think of it this way: they’re more likely to lend things to friends they know will return them.
Credit is when you borrow money from a lender (person or bank). People typically use credit to buy a car or a house.
Related: Teaching your child about credit
6. Credit card
A credit card is used to access money borrowed from a bank or other financial companies. You can then buy things with this card and pay the money back at a later date.
Related: How old to get a credit card?
7. Debit card
A debit card is a payment card you can use to withdraw cash at an ATM or when you need to pay directly for items in-store or online. A good example is the GoHenry prepaid kids debit card.
Debt is money you owe. In other words, it’s money you’ve borrowed that must be paid back. It’s not free money. That’s a gift.
When your grandparents give you cash on your birthday, they don’t expect you to pay them back. But when you run out of allowance and ask your brother to lend you $2 till you get your next allowance when you’ll pay him back, that’s debt.
A deposit involves transferring money to another party, usually a bank for safekeeping—for example, the savings pot on the GoHenry app.
A donation is a gift to a specific cause, like a charity. It can be money, clothes, food, or furniture. You can even donate your time.
Related: Importance of charity
11. Exchange rate
Exchange rates are what banks use to work out how much foreign currency (money) you get in return for your dollars. The exchange rate depends on how much each currency is worth on the day you swap one for another.
If you go on vacation to France, for example, you’ll need to use euros to buy things. When you go to the bank to change some dollars into euros, the amount of euros you’ll get depends on what the exchange rate is that day.
Inflation is when the price of things goes up. You’ll notice inflation when items you regularly buy cost you more, like milk, cookies, or candy.
Inflation affects the value of money. When prices go up, money is worth less because it doesn’t buy you as much. However, people’s wages usually rise to keep up with inflation.
Get your kids to ask their grandparents what milk, bread or even houses cost when they were young, and what they earned to pay for them.
Related: How to explain inflation to kids
Interest is the extra money you pay when you borrow money. You can also earn interest on money you save.
Show your child how this works by setting up parent-paid interest on your child's savings on the GoHenry app. The more they save the more interest they’ll earn.
Related: Explaining interest rates to kids
An investment is something you spend money on because you believe it will earn you a profit (more money) in the future. This could be stocks and shares, paintings, gold, or even vintage cars.
When you borrow something from somebody it’s called a loan. Whether it’s a book, a car or money when you borrow, it’s expected you’ll return it.
When you borrow money from a bank you not only have to repay it, you’ll also have to pay interest on it.
Your savings are money you regularly set aside for special things. It could be for a video game, a car or a vacation. Savings can be for long term or short term.
There are different ways to save. You might put your savings in a piggy bank, a savings account, a pension or an investment fund—or in a GoHenry savings pot.
Related: Explaining saving to kids
A stock is a piece of a company. If you buy stock in companies like Nike or Netflix, it means you own a small piece of it. Every stock has a price, which can go up or down depending on how the company is doing.
Taxes are money the federal government requires you to pay from your earnings. The IRS collects tax money and the government then uses it to pay for goods, programs and services to help the American public. Most tax money goes on things like social security, transport and national defense.
Related: Explaining tax to kids
19. Wants vs needs
A need is something you must have to survive, like food, water, and a home. A want is something you'd like but can actually live without. For example, you may want a new gaming console, but you don't need it to survive.
Related: Needs vs wants
20. Stock Market
A stock market is a place where people buy and sell stocks and shares. A stock market is an actual place, but you can buy stock online too. It’s a bit like eBay but for companies.
To help your child grasp these terms, Money Missions on the GoHenry app are a fun way to build financial confidence and curiosity. Our bite-sized lessons contain fun quizzes and videos on everything from saving habits to spending wisely, investing, and budgets.