My daughter turned nine last week, and she was thrilled to receive some birthday money. She received a total of $80 in cash, so she now has $80 to spend. Right?
This got me thinking about how we, as parents, often don’t take the time to discuss the difference between gross income and net income with our kids. Therefore, they don’t fully understand the realities of earning an income and having taxes, insurance and pension deductions coming off their paycheck beforehand.
This is a disservice to our children that could set them up for tough financial times ahead.
It’s even more difficult for teens entering the workforce to understand the difference between gross and net income as they receive direct deposits into their bank accounts. They may think their salary and what enters their bank accounts is the same number.
For example, when a young person graduates university and is offered a job at $80,000 a year, they might decide to go shopping for a house or a car and get lending quite easily. If they haven’t learned the difference between gross and net income, they may think they have $6,667 to spend each month. ($80,000/12 = $6,667)
In reality, if they are living in Saskatchewan, they may only be bringing home $58,115 a year after federal and provincial tax, Canada Pension Plan, and Employment Insurance premiums are deducted. So, they would have more like $4,842 to spend each month.
The difference between gross and net income, in this example, is $1,823. This is the amount we’re not teaching our kids about.
If they think they are making $80,000, they could be in danger of spending above their means. We, as parents and financial advisors, can help children better understand the difference between gross and net income and implement financial strategies to decrease the divide between these two numbers.