Teaching Teens About Money: Understanding Budgets

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Womans with documents and laptopWhile most parents agree that it is important to advise and guide their children when it comes to finance, getting teens and young adults to truly understand the importance of financial literacy and taking the proper steps towards good financial health is often easier said than done.

Recently, I addressed the huge issue of lack of financial literacy among college students and suggested that combating this epidemic of ignorance starts at home. Helping teach your teens about money and budgeting specifically is a cornerstone of a good financial plan. The process is therefore essential and starts with reviewing the basics.

What Is a Budget?

Despite widely-held beliefs and misguided notions about austerity and penny pinching, a budget has nothing to do with deprivation – quite the opposite! In its most basic form, budgeting is simply a plan. It’s a plan for how you spend your money that, once unleashed, can actually be freeing. By accounting for your income and expenditures you make it easy to buy what you want because it is stress-free and accounted for before you pull out that card or open up your wallet.

There is a technical side of budgeting, too. According to Investopedia it is “an estimation of the revenue and expenses over a specified future period of time…a microeconomic concept that shows the tradeoff made when one good is exchanged for another.” Basically, it helps you to understand finances as they relate to your life or business in a real, actionable way.

The goal of a budget, and another key element of financial literacy among young people, is to consistently spend less money than you make. This is a practice that businesses and individuals alike undertake and it is the key to building wealth.

How Teens Can Start Budgeting

The best, and easiest, way to begin to teach teens about budgeting is once they get their first job and start to generate a regular, if small, paycheck. Of course, many teens these days don’t work, so if they have an allowance that is another viable avenue for opening the budgeting discussion. It is also possible invite your teen to join in on the family budgeting process in order to see how a bigger income (and larger expenses) affect purchase decisions.

Because teens have little income and few expenses, it is easiest to start their first budget with a simple paper and pen, computerized spread sheets and budgeting apps are also available. The main goal is to account for two, opposing actions – money coming in and money going out.

Have them begin by tallying their paycheck and/or allowance over the course of a month and entering it into one column. Next, ask them to write down their regular expenses such as their portion of a cell phone plan or gas money in another column. To those regular expenses, have them write down each time they spend money over the next 30 days. It doesn’t matter if it’s on little things like a latte, or larger purchases like a new pair of jeans. At the end of the month, tally those regular expenses and those one-time expenses and compare them to the income in the first row.

It is only after having those numbers that the budgeting process truly begins…

The Budgeting Process

After having your teen look at his or her real income and expenses, it is time to begin budgeting. Start by asking a few key questions about the numbers on their paper, such as:

  • Did you spend more than you earned?
  • If so, how did you pay for those additional expenses (savings, a credit card, borrow money, etc.)?
  • How much do you currently have saved for an emergency or large future purchase (i.e. a new phone, tablet, or special wardrobe item)?
  • Can you add more to those savings next month by reducing some of those one-off expenditures? Is that important to you?

Once you both have a clear idea of goals and habits, it’s time to start planning for the future and drawing up a real budget which accounts for money before it comes in. Have your teen plan out his or her income and expenses for the next month. Take the money coming in and subtract those “regular” bills. Then, take a look at what is left and decide what to do.

Making the Budget – Assessing Priorities and Establishing Good Habits

Ultimately, its up to your teen to decide to spend his or her money. But you can make a few key suggestions. For example, a good rule of thumb is to save 10% of total income if possible, an expense that should come out after his or her regular bills are paid.

Then, discuss whether they want to save for a specific purchase such as a new tablet or pair of shoes. Talk about the cost and how much they reasonably believe they can spare each month to build up to the total.

Finally, look at what’s left. That is what they have to spend on other aspects of their life. Maybe they want to go to the coffee shop with their friends once a week, allocate money for that. Maybe they go to the movies one a month, allocate money for that. And so on.

Finally, if there’s anything left over, that money becomes pocket money for impulse purchases (yes, those are still important) or else gets added to the savings.

Extending the Lesson on Financial Literacy

Taking your teen through the budgeting process is one of the most important things any parent can do. By opening a dialogue and using real life and real money as an example, you show them how important and, well, real, budgeting and finance really is. You also begin to explore their attitudes towards money and have a chance to express your own.

Also, emphasizing the importance of a healthy savings account is important since it gets them in the habit of saving now, which will reinforce its importance later on when the money is greater, but so are expenses.

What methods have you used to teach your children and teens about money and budgeting?