Hey Kids: There’s More Than One Way to Earn Money!
As you help your kids become more financially literate, one very important lesson is this: there’s more than one way to earn income. When you earn and save income, you can put that income to work, making money on your money.
Kids thinking about income tend to focus primarily on the ways their friends and family members (probably you) earn money, which is generally working for an employer. Help them understand that there’s not just one path, but many different ways to earn money. Giving them that awareness early on will allow them to entertain a variety of income ideas and options as they grow.
Different Ways to Earn Money
1. Getting a traditional job (W2). This concept is a relatively easy one because, most likely, your kids understand that you go to work every day and receive a paycheck for the work you do.
It can be harder to build wealth with a traditional job because the more you make, the more taxes you pay. There’s an acronym: H.E.N.R.Y., that describes the potential problem here: High Earners Not Rich Yet. When taxes take a large cut, it’s harder to accumulate savings to invest.
One big advantage of a traditional job, however, is that the employer typically provides insurance and, often a 401(k) plan and other benefits. Explain to your kids what type of benefits you get from your job and how they help your family.
2. Self-employed, independent contractor (1099). In this scenario, you own your own business, selling either a service or product for which you charge clients. While your income varies based on sales, there can be real advantages in terms of saving and investing. Certain savings vehicles, like SEP-IRAs, are designed to help small business owners save and different tax rules can apply.
Important point: make sure your kids know they don’t have to choose between the two. The gig economy has helped lots of people create secondary income. As long as there’s no conflict and their traditional employer approves of their second source of income, your child can sell a service or product as an independent contractor while employed, giving them the opportunity to make extra money to invest.
One drawback to 1099 employment, however, is that you won’t have any of the benefits associated with traditional employment, like insurance or a 401(k) plan.
3. Portfolio income. When you invest your money, your money can go to work for you, generating more income. There are two common ways to make portfolio income:
a. Buying a stock and selling it at a higher price than the one you purchased it for. This idea is pretty self-explanatory! If you buy a stock for $1 and sell it for $1.50, your money has earned you more money – imagine multiplying that by 100, 1000, or more. You can use coins to help your kids see how quickly this money can accumulate. *Remember though when you sell the stock you will have to pay tax on it.
b. Buying a stock that pays interest or dividends. When you own stock, you own a piece of a company. Some companies issue dividends as a way to share their profits, which gives you another way to make money, in addition to appreciation in stock price.
Another advantage of portfolio income is that, as of the publish date of this post, the taxes you’ll pay if you hold a stock for more than one year are likely to be less than the taxes you’d pay on W-2 (traditional employer) income!
As you talk through these ideas with your kids, remember that this is a concept you’ll revisit time and time again, adding more depth and nuance as they get older. Eventually, you’ll talk in more detail about how having different streams of income can also help them significantly grow their money. But for now, your goal is simply to create awareness, so they understand the general idea: there’s not just one way to earn money.