Teaching your children more about finances is important to help guide their financial habits and financial literacy, but some of the more complex financial subjects can be hard to explain. ‘Year-over-year’, or ‘year-on-year’ (YoY) is a key way to look at businesses, savings, and other financial matters, but it's also pretty complex. Here's our simple guide for how to explain YoY to kids and teens.
What does YoY mean?
YoY stands for ‘year-over-year’ (also sometimes called ‘year-on-year’). It means comparing something at the same time for several years. For example, comparing how much money a business makes or earns every spring.
Why is YoY used?
Year-over-year is used because it is a very accurate way to look at financial growth or expenses. Many people compare one month to another, but this doesn't account for seasonal differences. Comparing different years at a specific point can give a more accurate view of financial progress.
For example, if your kid starts their own business selling handmade greeting cards, they might get a lot of sales in December, but then fewer sales in January. This might look like a failure, but the fact is that December will almost always be busier for greeting card sales than January because of Christmas, Thanksgiving, and other holidays. Before your kid thinks their business is getting worse, get them to look at YoY sales. That is, compare their sales in December each year. This will hopefully show that they are selling more cards in December each year compared to the previous year, showing growth.
To see this in numbers, say that in 2022, your child starts their greeting card business. They sell 10 cards in October, 15 in November, 35 in December, but only 5 in January. This looks like their business improved but then had a huge decline. On the other hand, consider that in 2023, they sell 10 cards again in October, 17 in November, and 45 in December. This year-over-year analysis shows a huge improvement compared to the previous year.
Another use for year-over-year comparisons is in managing bills and finances. It's hard to compare heating costs in winter against heating costs in summer. This won't show how heating costs shift, it'll show how much you have the heating on. Comparing year-over-year costs can help show the overall change. This is a great thing to teach your kids to help them plan and budget for the future more accurately.
Formula to calculate YoY
A year-over-year analysis is usually shown as a percentage. The formula for this is:
- (This year) divided by (last year), minus 1
For our greeting card example, this means the calculation would be
- 45 divided by 35, minus 1
This is roughly 0.28, meaning a 28% increase in sales!
What are the pros of YoY?
The main pro of YoY calculations is the ability to accurately look at how sales, costs, or other financial matters progress over different years. Looking at a specific time of year and comparing this across different years will help rule out any seasonal variations. A lot of people use YoY to gauge financial matters, so this also helps you compare your own growth or loss or change in expenses against other people.
What are the cons of YoY?
YoY also has some downsides. It can be hard to make sure that you get enough data in the analysis to make sure that your figures are accurate. For example, a YoY look at the third week of March could be very inaccurate if there is another factor that affects that week. It's better to do YoY calculations that look at a longer timescale. For example, most financial assessors use Quarters: three-month quarters of the year referred to as Q1 (Jan-Mar), Q2 (Apr-Jun), Q3 (Jul-Sep), and Q4 (Oct-Dec).
A YoY calculation also doesn't predict how well things will continue to progress. While it might show a general trend, things can always change. This is a problem for people who use YoY analysis to choose what stocks to invest in.
Other types of period-on-period comparison
Just like YoY calculations, there are other ways people compare different periods of a company's profits or someone's expenses. These include:
- Quarter-over-quarter - Comparing different three-month periods. For example, people could compare Q2 to Q1, which would mean comparing April-June against January-March.
- Month-over-month - This looks at individual months, over a shorter time frame. It can be useful in certain instances, especially if you're trying to work out a budget and want to see how well you are doing.
In fact, you can compare any periods that you feel are relevant.
What’s a simple way to explain YoY to kids and teens?
The simplest way to explain YoY to kids and teens is:
- Pick a financial matter to compare - For example, it could be how much money your child spends, or what they earn. Compare it from one month to another, so they can see the difference in how much they spent on candy with their allowance between the two months.
- Look at comparing it at different times of the year - See how the amount fluctuates and see if there's a seasonal reason — like if your child spends more money on ice cream during summer, there's an obvious cause!
- Compare year-over-year - Show how comparing different years will show a much more accurate analysis of how much they spend of their allowance, for example.
- For older children, explain how to calculate it - Most older children can work out this kind of formula if they have a calculator to hand. Use the formula we showed earlier in the article.
If you don't have numbers or figures to hand, make some up with your kid so they feel more involved. For example, ask how many greeting cards they think they would sell per month and use those figures to create additional years to compare.
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