This week I did a little experiment with my kids. I kept asking them “Where does the money go?”. I thought this was a good way to see if they can link all the different money lessons/stories I have shared with them over the years.
Start with money people earn
We started my little experiment by assuming someone had just earned some money from their job. I then asked them “Where does this money go?”
For each reply they gave, I then said “Where does that money go?”. Below is how the conversation developed.
ONE: Spending money
After my daughters said that people spend their money, I asked “Where does that money go?”. It got them thinking which I thought was really interesting as I’m sure most people don’t really ponder over where their money goes once they have spent it.
I then explained that the money usually goes to either a Company or a Landlord (to pay for their housing if they don’t own their home).
Before I asked where this money goes, I went back to the money that people earned to see other places that money goes.
I also reminded them of the Money Birds so they immediately said ‘Tax’. They know that some money people earn goes towards paying taxes for schools, roads and public services.
Again, I asked, “Where does this money go?”. They said the ‘government’, which is correct but I was keen to see if they knew what the government does with the money.
I explained that the government uses the money to pay for salaries (teachers, police, doctors, and civil servants at large). In my diagram, this means some money is going back to the top.
The government also uses tax money to pay for supplies (books for schools, uniforms, medicines etc) or for projects (building schools, roads, hospitals etc). The government gives companies money for both supplies and projects. My kids could start to see a bit of a pattern appearing.
For a lot of people, this is where the picture stops as all their money is either spent or given to the government in the form of tax. However, there are others who do save some of their money so we talked a bit about that.
THREE: Saving money in a bank
After my youngest said, “Some people save their money,” I asked, “Where does that money go?”. They weren’t sure as this isn’t a topic I’ve spoken to them about (which surprised me and I’ll definitely be writing a blog about banks in the future!).
I explained that whilst some of the money people saved in the bank is kept in the bank, most of the money is used by the bank so they can make more money.
Banks will usually use the money they receive to allow people to buy their homes (a mortgage) or lend the money to companies so they can grow their businesses.
Again, the picture of where the money goes became even clearer.
FOUR: Buying a home
The topic of the bank giving money to people to buy their homes led us to focus on the people who use some of the money they earn to buy their homes.
Most people who own their homes usually have a mortgage. So I asked, “Where does this money go?”.
I explained that the money is usually split between paying back the money they owe for their homes (the capital) and they also have to give the bank some money as a thank you for lending them the money (the interest).
This means some money is going back to the bank and some of the money is going to property/real estate.
As we were talking about property/real estate, I then went back to the start when we talked about people who pay rent to a landlord. This money is given to the landlord so they (the landlord) can pay for their mortgage - so this money was also going to the bank or to property/real estate.
This conversation briefly got us talking about one of the stories from Grandpa’s Fortune Fables (The Best Tree Competition). The key message from that story is that most people believe their home is a great investment but that’s not always the case. You can read that particular story here.
The picture of where the money goes was very clear. Nearly all the money that people earned funnelled down to either companies or property/real estate.
It was here that I reminded my daughters that companies and property are owned by people. So as more money funnelled to these two areas, it was those that owned companies and/or real estate that got most of the money that people earned.
Those people are the people who invested in the stock market or are buying real estate. This is why we invest our money and our daughters' money.
Using the analogy of money being like seeds, if you invest the money it is like planting the seeds. Everyone who is spending, paying taxes and putting their money in the bank is providing the sunshine and water to help the seeds grow into trees!
Most people who only spend, pay taxes or put their money in a bank rarely see their money grow.
I hope you found this little experiment interesting. Why not try this with your kids?
The more that kids appreciate where the money goes, the more likely they are to want to be the ones who are at the receiving end and will therefore want to start investing their money as they grow up.
To help set up an investment account for yourself and your kids, please check out our FREE guide here.
If you feel more families can benefit from understanding 'where does the money go?,' please share this with other families.
Thanks for reading!
P.S. Grandpa’s Fortune Fables is a great gift idea for friends with kids. It is fun and teaches kids about money - I’m sure you’d get a big thank you from both the kids and their parents.