Providing financial education to children is one of the best ways to prepare them for future financial success, and parents and guardians can play a significant role in this. To start, defining basic financial terms is important.
Child Tax
The child tax is a rule for how to tax children’s unearned income. Of course, as children, they do not earn income from work or from their employers like their parents do. In this case, unearned income includes interest, dividends, and other investment income. This typically applies to investment income in a child’s custodial account, which is a type of account that a parent or another adult can open on behalf of the child.
This tax aims to prevent individuals from avoiding taxes on their investments by purchasing them in their children’s accounts instead of their own.
Under the child tax, the first $1,100 of a child’s unearned income is tax-free. The next income is taxed at the child’s income tax rate, which is likely to be lower than their parents’ tax rate. Finally, any unearned income over $2,200 is taxed at their parents’ tax rate.
Why is this term important?
By opening an investment account for your child, you can start building their wealth from an early age. But if you plan to open an investment account for your child – whether to grow their savings or as a way to teach them about investing – it’s important to understand the tax implications. The child tax will affect your child’s investment returns.
Lease Agreement
A lease agreement is a contract between a person who owns a piece of property or land and a person who wishes to use that property or land. The contract serves as an agreement that the property will be used by the tenant for a specified period of time.
If you rent an apartment or house from someone else, you are likely to sign a lease. Similarly, many people choose to rent a car instead of buying one. Each lease will specify the duration of the agreement and the amount the user must pay to the property owner monthly.
Why is this term important?
Your housing and transportation are the biggest expenses in most people’s budgets. In 2020, these two expenses – housing and transportation – accounted for 50.9% of total expenses for the average household. They are also the most likely part of your budget that could involve a lease agreement.
This means that your children are likely to sign a lease in some way when they reach adulthood. It’s good to ensure that they know what to expect from this contractual agreement and the available alternatives when they are young. You can use your home or car – whether you are renting or owning – as examples when discussing how lease agreements work with your children. You can also show them a copy of the actual lease to help them understand the rules regarding the lease, as each lease can differ in that regard.
Mortgage
A mortgage is a type of loan or borrowing method used to purchase a home. Most people cannot afford to pay cash for a home, which means they have to borrow money from the bank. A mortgage is the specific type of agreement between the bank and the homebuyer that makes it possible for a person to buy a home.
Each month, you pay a mortgage payment to your bank. Mortgages come in various shapes and sizes, but most last for 30 years and have a fixed interest rate, meaning you pay the same amount each month for the entire mortgage period. And if you stop paying on the mortgage, the bank has the right to foreclose on your home (known as eviction).
Why
Is this term important?
For most people, a home is the largest purchase they will make in their lifetime, and a mortgage is the longest loan agreement most people will sign. When the time comes to decide between renting or buying a home, it is important to understand how mortgages work, the requirements to qualify for them, and the huge commitment you are making.
NFT
NFT stands for “non-fungible token,” a digital asset that represents a real-world item such as music or art. When something is non-fungible, it means it cannot be replaced or replicated. The term “token” is used to describe the nature of the digital item.
An NFT can represent almost anything, but they are often used to represent art, music, collectibles, and more. NFTs have provided a way for artists to monetize their work without relying on traditional platforms such as streaming services in the case of music or galleries in the case of art. Even a tweet can be turned into an NFT. Former Twitter CEO Jack Dorsey sold his first tweet as an NFT for $2.9 million.
What sets NFTs apart is that one person’s ownership does not necessarily prevent others from enjoying the asset. For example, Jack Dorsey’s first tweet is still available on Twitter for anyone to view. However, the blockchain technology, which is how NFTs are bought and sold, keeps a record of who actually owns the asset.
Why is this term important?
As of March 2022, NFTs are still relatively new in the investment world, and most people have not delved into them yet. But based on their rapid growth since 2020, NFTs are likely to increase in popularity and significance. Whether you enter the world of NFTs as an artist or an investor, it’s likely that you will engage with NFTs at some point with your children as well.
Electronic Bill Payment
Electronic bill payment is a service that allows you to pay your bills online instead of sending a check or paying in cash. In some cases, electronic bill payment may be a service provided by your bank, where you can schedule payments for all your service providers directly from your bank account.
In other cases, you may set up electronic payments directly with the employer or service provider. For example, your mobile service provider is likely to allow you to set up automatic electronic payments, and the amount will be deducted directly from your bank account each month.
Why is this term important?
Paying bills is one of the most important and fundamental tasks in managing your finances. In an increasingly digital world, electronic bill payment is becoming the most common option – and in some cases, the only option – for paying bills. It is more convenient than paying by check, and since it is often automatic, it helps ensure that you never miss a payment.
Sources:
IRS. “Publication 929 (2021), Tax Rules for Children and Dependents.”
IRS. “Instructions for Form 8615 (2021).”
U.S. Bureau of Labor Statistics. “Consumer Expenditures—2020.”
U.S. Bureau of Labor Statistics. “What the Consumer Expenditure Survey Tells us About Mortgage Instruments Before and After the Housing Collapse.”
University of Minnesota Law School LawSci Forum. “NFTs and the Tweet Worth $2.9 Million: Beliefs Vs the Legal Reality.”
Wyoming Legislative Service Office. “Research Memorandum Non-Fungible Tokens (NFTS).”
Source: https://www.thebalancemoney.com/the-abcs-of-money-for-kids-k-through-o-5223087
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