Every person has their own unique experience with money. As parents, it’s our job to set our children up for success, not only learning from our own mistakes but helping our kids learn from them as well. A great way to set your kids up for financial success? By teaching them the differences between active vs passive income.
Money habits are often formed by the age of seven. This makes it extremely important to teach your children the right habits when they’re young, so they’ll already have great money skills as money becomes a larger part of their lives. Much like teaching kids accountability, the best time to start teaching them is now.
With that in mind, let’s get started! Here is an easy, actionable, and kid-friendly guide to teaching your children about the different types of income.
Table of Contents
- Do Your Kids Know Why Money Matters?
- Familiarizing Yourself With Active vs. Passive Income
- The Importance of Balancing Incomes
Do Your Kids Know Why Money Matters?
Before you start talking about active vs passive income, it’s important that your kid knows about money in general. Chances are, they know what it is, but do they know why it matters? While most kids are familiar with birthday money or the idea of an allowance, they might not actually grasp the meaning of the money itself.
Rather than trying to explain concepts to your children, we’ve found it’s much more effective to give them examples instead. Let’s say the bike they want costs $100, and they get $10 a week for doing chores. The math is easy; the bike is worth ten weeks of their time.
On the other hand, a bag of their favorite snack might only cost $5. This will only take them half a week to earn. Translating money into time is a great way to introduce the concept of money, as most kids don’t like waiting! As such, the idea is very relatable and easy to understand.
However, this is a simplified view of money. To really teach them proper money management, they’ll need to learn about the different types of income.
Familiarizing Yourself With Active vs. Passive Income
If you’ve explained the above examples to your kids then they’re already somewhat familiar with the “active income” part of active vs passive income. Essentially, active income is something that requires active effort on your part. For kids, this could be something simple like selling lemonade or dog walking. As adults, this would usually be putting in hours at your job or making a sale.
Active income is very easy to teach to children because it has immediate, noticeable results. Passive income, though, can be a bit harder to explain properly.
Basically, passive income is income that doesn’t require active effort. Of course, that’s not to say it doesn’t require any effort at all. After all, money doesn’t grow on trees—it has to come from somewhere!
For adults, passive income generally comes from investments. Whether it’s rental income, positive returns on your stock portfolio, or interest in your savings account, these all count as forms of passive income.
Explaining Active Income to Your Child
Now that you’re familiar with active vs passive income yourself, it’s time to start teaching your kids about these concepts. It’s best to start with something they’re already familiar with, if possible.
Completing chores or selling old toys are usually two great examples we like to reference. Both of these require direct involvement from your child to complete the task at hand. Once the task has been completed, they’ve made some money!
Even if your kid is too young to do most household chores, it’s still easy enough to teach them about active income. When we were building the My First Nest Egg app, we had 7 kids between us, all under 10. We built the app with little kids in mind, because we noticed there wasn’t a good option on the market for that age group.
The My First Nest Egg app allows parents to build a digital chore chart in the form of a puzzle. Kids get pieces and earn either money or other rewards for each chore or accomplishment.
Once they’ve completed a puzzle and have been “rewarded”, most kids pick up the idea of active income quickly. Just make sure that the tasks that are more in-depth have a better payout so that your child will understand the correlation between effort and rewards!
Explaining Passive Income to Your Child
Passive income might sound like a grown-up concept, but it’s something kids can begin to understand with the right example. One simple way to explain it is this: passive income is money you earn without doing extra work. It’s like planting a seed and letting it grow while you do other things.
For kids, a great way to demonstrate this is through interest—a small reward for saving money over time. You can say, “When you set money aside and don’t spend it right away, sometimes you earn a little extra just for being patient.”
A helpful way to make this real is through the My First Nest Egg app, which pays out interest on savings goals. Kids can see firsthand how their balance grows slowly over time, reinforcing the idea that saving consistently can lead to more money in the future.
For older children, this can be a jumping-off point to talk about how banks work, or even an introduction to investing. For younger kids, it’s just enough to understand that saving has its rewards—even if they’re small at first.
Just make sure your child knows that passive income isn’t magic or guaranteed. Sometimes the extra money is more, sometimes it’s less—but the habit of saving and letting your money work for you is what matters most.
The Importance of Balancing Incomes
By this point, your little ones should have a pretty good idea of the active vs passive income differences. Active income is the best way to get money “now”, while passive income is a great way to get money later. Both income types are valuable, but it’s also important to teach your child that these work best as a pair.
With a solid understanding of active income, your child will put more value into hard work as they’ll be able to see the results of their efforts. The results of passive income streams aren’t quite as visible, but they help your child start to think in the long term, not just about the latest trends they want to have a part of.
You can help reinforce these active vs passive income lessons by monitoring their spending habits, teaching them simple budgeting techniques, and helping them plan their financial goals. Spending only part of the money they earn will let them enjoy the results of their active income while encouraging savings for later can teach them the value of long-term financial planning.
Ultimately, first-hand experience is the best way to really learn these concepts. As such, we recommend advising but not overly controlling your child’s spending habits. Financial mistakes can and will happen, but they’re great learning experiences. By making these mistakes now, they can learn important lessons right away, giving them a better chance at financial freedom in the future.
From Idea to Practice
Here at My First Nest Egg, we are all about teaching kids the importance of finances. Starting a family business, setting up a savings account, or even playing games like Monopoly can all be great ways to help reinforce these concepts. However, we think that using our app can be even more effective!
With the app, your child will really be able to see the benefits of passive income come to life. Our virtual piggy bank lets kids track their active vs passive income, monitor their savings, and even budget better. Best of all, it doesn’t require any personal info—just download the free app and start bringing these teachings to life right away!
Tips & Tricks to Make Your Teachings Stick
It’s easy to give your child a lesson, but the really important part is making sure that those lessons stick. Here are a few notes we put together that should help your child better understand and remember these money concepts.
- Keep things simple and age-appropriate. Use words and concepts that your child will understand. “Experiencing economic downturns” isn’t really something they will understand, but “not having money for snacks” is definitely one they will!
- Don’t Forget the “Why”. Teaching your kids how to make and save money is important, but it’s vital that they understand why money is so important in the modern world too. Remaining calm and patient when talking about money will help make this an approachable topic moving forward.
- Lead by example. Kids tend to notice quite a bit more than we give them credit for. If you’re telling them one thing and doing another, they’re likely to pick up on it pretty quickly.
Active vs Passive Income FAQs
Is it better to have active or passive income?
Really, it’s best to have both! However, for most people who are in their working years, it is critical to have an active income. This means you’ll be actively bringing in money, which you can then invest and turn into a passive income later on down the road.
What is an example of active income?
There are many different examples, but having an hourly wage, a salary, receiving tips, or getting a bonus are a few of the most common ones.
What are the cons of passive income?
Having passive income sources is great when it comes to financial security, but they do have some downsides. For starters, most passive income sources require having some sort of upfront investment. Returns are never guaranteed, control can be limited, and it’s even possible to lose money if the market starts to turn in the wrong direction!
As a parent, you can shape your child’s financial future, helping them work towards achieving financial freedom later in life. Teach them the concepts, give them examples, and then let them try it out for themselves.
With a bit of time, patience, and hands-on experience, your child will gain the skills to handle their money with confidence. Learning the difference between active vs passive income might seem simple enough, but it’s actually a huge building block, and one that will surely help set them up for success for their financial future.
