Teaching Your Kids to Budget
By Carlos Filio
Parenting comes with a long list of things you’re responsible for teaching your children to set them up for a good future. Beyond the basics of walking, talking, potty training and the birds and the bees, you’ll also want to begin teaching your kids the value of money at a young age.
How to Start
Early on in elementary school, your kids will likely start to learn how to count money. What coins add up to a dollar, and what money is used for. Understanding the true value and purpose of money will come with age and they should earn a little more understanding with every year they grow. One way you can help them through this understanding is through a weekly allowance.
This is something that can be done a couple years into elementary school as a hands-on approach to knowing how to handle their own money. Over half of the households in America are giving their children a weekly allowance, and it doesn’t have to break the bank. An easy rule of thumb is to give your child $0.50 to $1 for their age each week, so your 10-year-old could be receiving $5-$10 weekly, but of course it’s up to you and what you can afford. Increasing the amount every year just coincides with their greater compression of money and their ability to handle more as they mature.
How to Budget Your Child’s Allowance
The first thing to do is obviously discuss the idea of an allowance with your child at their lower level of understanding. You want to make sure that your kids understand what you’re giving them, why, and what rules may be associated with the money. This includes, but is not limited to, the amount you’re going to give them, what they have to do to earn this money, and can it be withheld. For example, you will decide if your child should have to complete chores to earn their allowance, or if they will receive it regardless. Do they have to complete all of their chores to receive the full payment? Or can it be done in parts? Will they earn a “bonus” for things like good grades or doing extra chores without being asked? It’s all up to you and how you want to teach the value of money and of working for it.
After they understand the ground rules, you’ll want them to know what to do with their money. There’s that old saying when it comes to money, “Save a little. Spend a little. Give a little.“ But what counts as “a little” in each of those categories? It’s recommended that children save 10-25% of their money, spend 50-80% of it, and give 10-25%.
A tip that some like to use in this scenario is literally dividing the money you give your child into three separate piggy banks dedicated to each of those causes. It ensures that the money you give them actually goes towards what it’s supposed to. However you decide to approach it, be sure that you’re helping your child work through their goals, writing down what amount they hope to save up or what it’s going towards, and helping them to determine what they might want to give their money to. This approach is great, because even if you don’t give an allowance, it still works for any money they receive as gifts.
How to Budget with Your Teenager
Things start to change once your child hits their early teens since they’re now starting to become a real person. Not only are they able to comprehend money even more, but they may be starting their first job or having actual expenses like cell phone bills or gas.
First, you’ll want to determine their income to start talking budget. They could be working their first job and earning money of their own, or you could still continue to give them that small allowance. Factor in all of their earnings, including gifts, and help them add that all up to set their monthly budget. But because they’re older with more responsibilities, you’ll have to subtract their expenses from this income.
Now that they’re older, you may stop the three piggy bank game and decide to open up a bank account for your child. On the one hand, this could be required from their job as many places will do a direct deposit into their checking account, but on the other hand, opening a savings account will help your child to start earning interest on the money they save, helping them towards their bigger and farther off financial goals like college or even retirement way in the future.
Once your child has a place to put their money, you can figure out where it should go! Take this as an opportunity to discuss your child’s financial goals. What are they saving up for? Often times, kids will do better with more short-term, concrete goals of the fun things they want right away, like a new pair of shoes or a bike. But, you may also use this as a chance to discuss long-term savings. Still – it’s your child’s money and you will have to let them spend it how they want, as long as it doesn’t stop them from their goals or break any rules you have already set for them.
Their budget doesn’t even have to look too different from yours. While the amount they have to spend may be smaller, you should still help them to distinguish between wants and needs, and what falls under Necessities, Financial Goals, and Flexible Choices.
Don’t micromanage your kids, but do keep track of their spending in light-hearted ways. It can come up as a topic of conversation at dinner or as you help them with their homework. This way, you can see if overspending is an issue, and suggest ways that they could either cut back on spending or to earn extra money. And in this case, making a couple of mistakes is okay - almost better, even. At this point in their life, they have a lot less to lose by having a few financial flops. Better to learn how to recover from them now than when their older and have a lot more to lose.
