What is an expense? In simple terms for kids

As parents, it can be tricky to break down money topics when talking to our kids. After all, they have more important things on their minds, such as the newest video game or that must-have pair of shoes. Here’s a tip: Next time they bring up an item they want to buy, use it as an opportunity to teach them about expenses.  

Expenses can be necessary or desired. A necessary expense pays for something you can't do without, like shelter or food. Desired expenses cover things you want, like a vacation or a takeout dinner. Understanding the difference can go a long way toward helping them manage their piggy bank. 🐷 

What is an expense?

Explain to your kids that an expense is something you pay for. When you use your money to buy or use something, it is an expense. For instance, your rent or mortgage for your home is an expense. So are a pair of sneakers and the monthly internet bill. 

An expense is the opposite of income. An expense means you're paying money to someone else, so it transfers from you to them. 

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Income refers to money coming to you, like when kids or teens earn cash for doing chores. Some people earn passive income from their investments, like stocks and bonds. 

When describing an expense to your kids, use meaningful examples they’ll understand. For instance, if they love to watch certain shows or movies, explain how you had to buy a streaming subscription to make that possible. You could show them the monthly statement and explain how the money comes out of your account to pay the bill.

What is a fixed expense?

There are two basic types of expenses: fixed and variable. You may have a combination of fixed and variable costs.

In a fixed expense, the amount you pay for a product, service, or other good doesn't change. It remains the same month to month unless the person or company selling the item decides to increase or decrease it. 

If a customer has a contract to pay a certain amount for a product or service, like a mortgage, the expense amount stays the same until the contract ends.

What is an example of a fixed expense?

An example of a fixed expense is your monthly cable or streaming service bill. You pay a monthly fee to access content like movies or TV shows, which stays the same unless the company increases it.

Your children likely watch TV a few times a week, so they’re aware of its importance. You can tell them what the monthly bill is and how it stays the same each month.

What is a variable expense?

Unlike a fixed expense, the cost of a variable expense changes monthly. There’s no requirement for its price to stay the same. Various costs fall into the variable expense category, including entertainment, clothing, and gifts.  

What is an example of a variable expense?

An example of a variable expense is dining out. Every month, you may eat a few meals at restaurants or from fast food takeout. However, if you decide you want to cut costs one month, you could avoid dining out entirely. 

You can use dining out to describe how increases or decreases in variable expenses impact your monthly budget. The less money you spend at restaurants, the more money you’ll have for other items. 🤓 

Understanding expenses is important for budgeting

If your expenses are more than the money you earn from income, you won't have enough to pay for everything you use or buy. That's why it's essential to start a budget.

A budget lays out your expected income and your monthly expenses. It’s also important to set aside money for saving every month. If you stick to your budget, you should have enough money to pay for all your expenses. 

Show your kids how you can adjust your budget to meet your goals. For example, if you want to save more money, you could try to reduce your expenses. You might buy less expensive groceries or wear last year's clothing 👗 instead of buying new things.

Another way to save more is by increasing your income. If your kids are old enough to start earning some income, encourage them to look at simple side hustles, like mowing yards for your neighbors for a fee. 

Greenlight tip: Boost your kids’ understanding of budgeting, income, and expenses with the Greenlight Level Up game. Greenlight's Level Up game helps teach kids the fundamentals of money through fun interactive videos and mini-games.

Promote financial education at home

While your kids may be a few years off from buying their first car or renting an apartment, there's no reason why you can't begin teaching them financial basics like budgeting and managing expenses. Any knowledge they acquire now will only benefit them as they become adults and need to manage their own household finances.

Greenlight offers many tools to help you get started, such as the Level Up game. You can also explore our blog, which provides many articles to help the whole family increase their financial literacy. 💸