Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions.
This week’s episode we take on money questions from two kids, Ellington and Langston, who want to know where money comes from, where it goes after you spend it and how to decide how much you need to save.
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Before you build a budget
Track all your spending at a glance to understand your trends and spot opportunities to save money.
Chances are, you think about money a good amount. But it can be helpful to slow down and think about the fundamentals of how it actually circulates around the economy and the role you play in that cycle. In this episode, we take on two questions from young listeners who helped us do just that. One asked: Where does money come from, and where does it go after you spend it? Another wondered how to decide how much money to spend and how much to save.
The answers are more complicated than you might expect. Money is created by the federal government, but before it gets to you, it takes a long and circuitous journey through cash registers, banks and other people’s wallets. When you spend a dollar, you’re casting it back into the economy once more, and you never know where it might wind up. We visited a bank to get a sense for the different ways money can travel.
Search for the simple answer: If your kids are asking you money questions you can’t answer, don’t be afraid to dig in and challenge yourself to break through the shorthand you use every day.
Lose the lingo: To help answer kids’ money questions, look for specific examples and materials they’re familiar with. And don’t be shy about asking experts to explain what they know using plain English!
Master the basics: Even having a basic concept of how much money you need to save and how much you can spend can do wonders for helping you meet your financial goals.
More about money and saving for kids on NerdWallet:
Sean Pyles: Welcome to the NerdWallet Smart Money podcast. I’m Sean Pyles. On this podcast, we usually answer adults’ money questions, but not this time. This time around, we are answering a couple of kids’ money questions, actually. And leading the Nerdy charge this episode are Nerds Andy Rosen and Johanna Arnone. Can you guys each say a little bit about yourselves and what we’re doing here today?
Andy Rosen: I’m Andy Rosen. I’m a writer on the investing team at NerdWallet. I’ve been a journalist for more than 15 years, and in my spare time, I’ve always enjoyed making content for kids, including some podcasts for kids in the past.
Sean Pyles: Cool. And you have kids of your own?
Andy Rosen: Yep. I have two kids, aged three and six.
Sean Pyles: OK. And Johanna, what about you?
Johanna Arnone: I’m Johanna Arnone, and I’m an editor here at NerdWallet on the mortgages team. Before I got to NerdWallet, I edited magazines for kids. And I am also a parent. I have an 11-year-old and a seven-year-old.
Sean Pyles: OK, great. So I’ve got to ask you, what’s the deal here? Kids are not known for having a lot of financial decisions to make, but here you two are answering a couple of kids’ money questions.
Andy Rosen: So we got some great questions from kids around the country, but I was particularly interested in a message we got from Ellington and his brother Langston, who live in Baltimore. They had some really fundamental questions about how money comes and goes.
Johanna Arnone: This is one of the reasons I enjoy trying to talk to kids about grown-up topics. Because when you really break down the questions they ask, it challenges our own understanding of things that we thought we knew. Think about all the shortcuts that we take just to get through the day. And those shortcuts don’t work for kids. What is money? Try answering that question quickly.
Sean Pyles: OK, cool. Well, I will let you guys take it from here.
Andy Rosen: I called up Langston and Ellington, and here’s what they asked.
Ellington: My name is Ellington, and I’m eight, and I’m from Baltimore.
Andy Rosen: All right. And do we have another one there?
Langston: My name is Langston. I’m six years old. I live at Baltimore.
Andy Rosen: Great. Well, it’s really nice to meet you both. I heard you guys had some questions about money. I’d love to know what they are and tell me how I can help you find out. And you know, maybe why you’re curious.
Ellington: I want to know where does money come from, and where does it go once you use it?
Andy Rosen: Well, what do you think?
Ellington: I think the money comes…it’s just like, it comes from…I actually don’t know.
Andy Rosen: Do you ever get money?
Ellington: I actually have a piggy bank that looks like a car with wheels that actually turn.
Andy Rosen: Oh, that’s pretty cool. And where do you get the money to put in that piggy bank?
Ellington: Some of the money was l already in there when I got it. Some money I just found and I put it in my piggy bank.
Andy Rosen: Have you ever thought about taking money out to do something with it?
Ellington: Yes, but there’s a key that goes with it and I don’t have the key.
Andy Rosen: Well, that causes you to save, I guess.
Ellington: My brother has a question, too.
Andy Rosen: Let’s hear it.
Langston: I want to know why, how much money to spend and how much money to save.
Andy Rosen: Is there something you want to buy or something you want to save up for?
Langston: I wanted to get a Bumblebee Transformer.
Andy Rosen: Oh, that’s so cool. Bumblebee is a great one. So I think we have two questions here. One is, how do you save up for something? And the other is, where does money come from and where does it go? I’m going to take these questions and work on them with my colleague and we’ll get some answers for you.
OK, I’m here with my colleague, Johanna.
Johanna Arnone: I guess the first question that we should start with is where did the money come from to begin with, and what was its starting location? I definitely think we need to talk to some people who can tell us more about their corner of expertise.
Andy Rosen: What I’d like to do is see what happens at the bank.
Johanna Arnone: I think that’s a good idea. While you figure out where the money is coming from, and where it’s going, to answer Ellington’s question, I’m going to look into how to buy a Bumblebee Transformer to help out Langston.
Andy Rosen: I got in touch with some people at Brookline Bank, which is one of the regional banks here in Massachusetts, where I live. So, who are we talking to now?
Peter Moroney: Peter Moroney, branch manager of the Clarendon Street office with Brookline Bank. We are a branch, so we accept deposits from customers. Customers come and make withdrawals. We also open accounts for personal customers and business customers.
Andy Rosen: So, the money comes in here and it goes out of here.
Peter Moroney: It does, yeah. We are kind of like a large piggy bank, if you will. Customers will bring money here, and we’ll hold it for them. We pay interest on it at times, so it’s a good idea to put some money in a bank so you could potentially make a little more money. And if you ever want your money back, you could come get it from us and make a withdrawal from the piggy bank.
And we also help businesses where you could spend your money. The ice cream store around the corner or the comic book shop, they could come here with the money that you have spent at their shops, and also put it in the bank.
An ATM machine is another way for people to access money. Again, take money out of the bank or put money into the bank electronically rather than come into the branch. Most banks have an ATM machine where you can make those types of transactions. So you have a debit card, a lot of kids’ parents probably have them, and they’ve seen them use them at stores. So you can use that card here at our machine to get cash or make a deposit.
Andy Rosen: So if you put money into that, what happens? You can put money into an ATM as well as take it out, right?
Peter Moroney: Oh, absolutely, yeah. An ATM is a teller. You’ve seen tellers at a bank when you go, probably with your parents, somebody’s standing behind glass accepting deposits. It does the same thing, except it’s a machine. So it’s going to take the money in, it’s going to hold it for you, it’s going to process it for you.
Andy Rosen: If you put your money into the ATM machine and you come back and get money out, it’s probably not going to be the same dollar bill, right?
Peter Moroney: That’s a good question, but no. I’d love to say that it stays in a little pot in the back, but it doesn’t. There’s a little compartment that will accept money that comes in, and then we process it one way, and there are other compartments that hold money that’s going out. So there is an in and out box, if you will. That’s separate. So yeah, it’s not the same stuff.
Andy Rosen: So when you put it in, the bank will then record that your account now has this much in it, and you might use those dollar bills to do something else, but you can always come back to the bank and get dollar bills, is that right?
Peter Moroney: That’s absolutely correct, yeah. That’s the best way to put it.
Andy Rosen: Got it. OK. Michael Rawan, who’s in charge of all their deposits, that’s money coming into the bank, offered to break it down for me a little bit more.
So Langston and Ellington were talking about having piggy banks and saving that way, and they wanted to know, “Once I spend my money, what happens to it?”
Michael Rawan: Let’s talk about the piggy bank itself and how it works today. And it’s great for the people that are using it. So you have it in your house, hopefully somewhere secure, you put money in it, your parents or other family members can put money in it, and it works great. So if you have the money in the piggy bank, how do you know how much is in there? Well, you could open it up and then count it, but that could be problematic every time you want to know how much money is in there. So there are some drawbacks to the piggy bank. So really that’s where the bank comes in, if you think of it. So it’s still the same concept. It’s still your money. But instead of it being in the piggy bank, it’s here at the bank in what we call an account.
Andy Rosen: Maybe we can talk a little bit about why it’s different to have money in a bank in terms of what happens to the money after you spend it. So, if I want to buy a cookie from my friend, I bring a dollar to his house. I give him the dollar, now he has the dollar. It just really sits there, right? If I have money in the bank and I buy a cookie from the store, what happens with the money is quite different. And I’m wondering if you can talk about what happens to that money after it gets spent and how it gets here, and maybe what happens to it once it’s here.
Michael Rawan: Sure. So let’s go back to that example. You’re at the store and you buy the cookie, the candy bar, the magazine, whatever. And let’s say all that’s $10. You give the store the $10, however you do it. Whether it’s the card, the check, the cash. Now the store has that $10. So the more candy bars, and the more magazines that store sells, all throughout the day, they collect all that money and they deposit that at their institution.
But then they also go back to their institution, their bank, and they make payments out. They pay all their employees. They pay all their vendors that are providing them with the inventory for the store. They pay their landlord for the rent. And then what happens is those people are all receiving the money, and guess what they’re doing? They’re paying their employees, or they’re saving the money, or they’re going out and buying things for themselves.
They’re buying food, groceries, whatever. So the money is, really when you think of it, is for the most part, with the setup of the banking system, what we are doing is we’re routing the money, where the money is all moving throughout the day 24/7. And it’s going in and out of all these different banks. And really when you think of it, the importance of the banks is, at any time, if you need us to tell somebody how much money you actually have, they get an independent, authorized, trusted resource saying you have this much money at the bank at this time.
All right, Johanna. So I went to Brookline Bank and I found out a lot of cool stuff about where money comes from, where it goes and what happens when you spend it.
Johanna Arnone: I love a good field trip and it sounds like that’ll help us answer Ellington’s question, but let’s not forget about Langston’s question. So I’ve been browsing the toy aisles, looking at Transformers, and I did some research into what Langston asked us about, which was how to spend money and how to save money, and how much to do of each. So, that gets at that idea of affording a Bumblebee Transformer. I can talk more about that when we speak to the kids.
Andy Rosen: OK, great. Let’s call up Langston and Ellington and tell them what we learned.
All right. Well, thank you all for your awesome questions. We’re really excited to share with you what we learned. I brought in my colleague Johanna here, and she helped me answer these questions. Do you want to say hi, Johanna?
Johanna Arnone: Hi there. Nice to meet you guys.
Andy Rosen: Well, I guess we should just get started. So I really took on Ellington’s question. I thought it would be good to go to a bank, and what I found was really interesting. If you put a dollar in the bank, it’s really different from putting it into a piggy bank, because what you really do is you give them the dollar and they write down how much of your money they have. They just have a certain number of dollars and they keep track of it for you. So it makes it easier for you if you want to spend it or save it without carrying it around, that’s kind of what a bank does. I guess, what did you think would’ve happened when you spent a dollar? What was in your imagination before?
Ellington: I thought the people would get the money and then use it to pay for stuff that they needed. And then the stuff that they paid for would go, and then it would just keep going around, and then maybe sometimes the same money would come back to you.
Andy Rosen: You know, it is possible. It’s really hard to tell because all dollars basically look the same. But if you look really closely, you might be able to find some signs that a dollar you had before is the same dollar you have again, but you were really spot on. I think you had a great grasp of it going in, and I think that’s probably why you asked such a great question. So I’m going to hand off to Johanna here, and she’s going to talk a little bit more about Langston’s question.
Johanna Arnone: Super. So Langston, I heard that you asked about how much money to spend and how much money to save. And I just wanted to tell you, I think that is such a smart question. And the short answer is that it’s a good idea to spend part of your money and save another part. Keeping your money for another day instead of spending it today, that’s saving, right? I bet that’s something you already knew. Am I right about that, Langston?
Johanna Arnone: OK. But I think you were curious about how much, exactly. So I looked up some ways that grown-ups make these choices using something called budgeting. But I think you and I should do an activity to figure it out together. Are you willing to do that with me?
Johanna Arnone: OK, thank you. I want to use our hands to help figure out budgeting. So anyone listening can follow along with us as we try this. Let’s hold out both of our hands in front of us, with our fingers spread out, and let’s wiggle our fingers and thumbs. So I’m looking at mine, and these fingers and thumbs are going to represent all the money that we have right now. Can you see your hands right now in front of you, Langston?
Johanna Arnone: Cool. All right. Now let’s do this. Tuck in your thumbs, and wiggle just those fingers that are above your palms. That part is the money that you can spend now. And you could spend it on the things that you need or the things that you want. All right, now we’re going to reverse it. Now, fold down your fingers so only the thumbs are sticking out and the fingers are all tucked in. Wiggle your thumbs. That’s the part of the money that you can save for another day. All right. I’m going to shake out my hands and let them relax. You can do the same if you want. Langston, I heard that you wanted to buy a Bumblebee Transformer. Is that right?
Johanna Arnone: Cool. Is there anything else that you’re hoping to save up for and buy?
Johanna Arnone: What is it?
Langston: Probably, I would just buy some groceries.
Johanna Arnone: Yeah? You would? You’d help out your family like that?
Johanna Arnone: Would you get something good to eat?
Langston: Yes. And also I would get something for my brother.
Johanna Arnone: Wow. That’s really nice. All right. Well, let’s take those two examples then. If you check out how much a Transformer, or how much the groceries that you like cost at the store and that amount is what you have right now, that’s part of your spending right now money, right? Or you could check, and the price could be more than you have right now. And that would be OK because you could keep saving part of your money until one day you would have enough.
So in general, saving is a great habit to practice when you’re a kid, when your goal is to buy something super fun, like a Transformer or super thoughtful, like snacks for your brother. But then when you grow up, you will already have a plan for how to always be setting aside money for the future, so you can cover surprises and big expenses. So maybe the answer is, spend just part of your money, and when you save the rest, give yourself two big thumbs up.
Andy Rosen: Well, what do you think? Do you think we’ve answered your questions? Do you think you’ll be able to make good money decisions now?
Langston: Yes. Thank you for helping us.
Andy Rosen: Thank you. It was really fun to hear your questions, and I think I learned a lot just trying to answer them.
And that’s all we have for this episode. Do you have a money question of your own? Turn to the Nerds and call or text us with your questions at 901-730-6373. That’s 901-730-NERD. You can also email us at [email protected] Also, visit nerdwallet.com/podcast for more information about this episode. And remember to follow, rate and review us wherever you’re getting your podcasts.
Johanna Arnone: And here’s our brief disclaimer, thoughtfully crafted by NerdWallet’s legal team. Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This Nerdy info is provided for general educational and entertainment purposes, and may not apply to your specific circumstances.
Andy Rosen: Also, if you’re a kid, make sure you talk to your parents before you make any decisions about money. And with that said, until next time, turn to the Nerds.