Financial experts everywhere stress the importance of teaching kids how to budget, but they often fail to point out that doing this requires your child to learn about and understand two basic concepts: gross and net income. These two elements are not the same and need to be kept distinct as your child learns to work with his money. The difference becomes critical when your child gets ready to get his first job.

 

Basic Definitions

Gross income is all the money you get within a given time period (usually a month). For adults, this usually comes from your work pay, but there are many other sources of income, such as lottery winnings, interest earnings, and the regular liquidation of assets and investments. For kids, gross income is often an allowance, but it can be gift money or funds they earn from their chores or doing under-the-table jobs.

Net income is what’s leftover of your gross income after you take care of necessary “non-negotiable” expenses. For adults, taxes and contributions to retirement accounts are common costs. Kids don’t really have these kinds of issues until they start formally working, but examples that could be seen as necessary costs might include school supplies—school isn’t optional, so even though parents often help out, kids don’t really have a choice about whether they’re going to spend money on education-based items.

A Basic Method for Teaching Gross Versus Net

Kids and snacks pretty much go hand in hand, so use this to your advantage and use it as a teaching tool. Buy a mixed bag of candy or party mix. (Hint: Want to keep this healthy? Even a bag of mixed vegetables or fruit bowl works.) Tell your child that they can chow down on it, but only after they do a little sorting. Place everything in one large bowl. Then pick one type of candy or ingredient to eliminate from the mix. Have them set all of that one candy or ingredient in a smaller, medium-sized bowl. Explain that this is essentially what happens with income. All the candy or mix together in the big bowl is the gross or total income. The ingredient or candy you set aside in the medium-sized bowl is the money you have to use to cover non-optional expenses. What’s left of the main bag or mix is the net income, or what you have after your costs are covered.

Dividing Net Income

Once your child sees that you take some money out of your gross income to get your net amount, there’s still a little work you can do. Take the “net” candy or mix left in the big bowl and divide it even further. Every ingredient or candy type is like the regular everyday bills you have to pay, such as rent, electricity, and food. If you put each of these ingredients or types of candy in small bowls, you can explain how these expenses are like different buckets in your budget—you put some of your net income into many of these buckets in order to live. Ideally, you should give saving and entertainment their own bowls, as well, so your kids see that these come out of net income, too, but making the expenses the priority can show your child why it’s sometimes so hard to find money to set aside or put toward fun.

QUICK TIP: Many bags of party mix and candy will have a fairly even distribution of types or ingredients. In real life, you don’t allocate your money so evenly. You usually pay more on your mortgage or rent, for example, than you do on your phone bill. You might want to prep for this lesson ahead of time by presorting and preassigning what you have, taking out what doesn’t work for you.