Teaching the Young to Budget

Teaching the Young to Budget

One of the critical components to creating wealth while avoiding debt is to learn how to live on less than your income. And one of the surest ways to do this is to develop and stick to a practical budget.

Accordingly, if we want to groom our children for financial success, we need to teach them how to budget. Conventional wisdom suggests that we should begin the process as soon as they receive an allowance or more importantly, when they land their first job.

The Plan

To begin, we need to determine the best means for young people to create and track their budget. Some will recommend that they start with pen and paper since the brain makes different connections when we write something out. Thus, young people will learn faster and have a more intimate understanding of budgeting by first doing it on paper. Once they have a basic understanding of the process and workings, they can move to an electronic format for doing a budget—such as Microsoft Excel or a free budget app. However, it is suggested that one should wait at least six months before making the transition.

How Often to Budget

A budget should be created that matches a young person’s pay schedule or allowance period. If they have a job and get paid every two weeks, have them develop a bi-weekly budget. If they receive an allowance once a week, a weekly budget makes the most sense. And, as they improve their understanding of the entire process and the key objectives, budgets spanning longer periods of time can be introduced. The latter exercise will provide more of an understanding of how a budget can ebb and flow over time.

Building the budget

Income   

young-to-budget

Using their most current paycheck (or allowance), have them begin the process of actually developing their first budget for that specific time period. At the same time, have them create the next budget for the following pay period. This exercise is intended to begin identifying, forecasting, and recording anticipated income for the next couple of weeks. If their work schedule is somewhat irregular, have them estimate the number of hours they expect to work, taxes, and their “take home” or net pay. And don’t forget to remind them to adjust their income due to changes in work schedules because of sports, vacations or other extracurricular activities.

Expenses

It is now time to have them estimate what their day-to-day living expenses will be between now and their next paycheck. This may include clothing, gas, food, makeup, entertainment or other sundry items. Next, have them create a list of near-term activities that are likely to require added savings such as a prom or school field trip. This exercise will allow them to see the additional monies required for those anticipated expenses. And, don’t forget to have them budget for future items such as a car—or even college!

Calculate the Difference

At this point, have them subtract the expenses from their income based upon each pay period. If the budgeted expenses are greater than their income, have them go back and reallocate! If the opposite holds true, have them earmark extra monies towards future purchases or for increased savings.

Maintaining a Budget

Now that there is a functioning budget, explain that it is important to make adjustments whenever their expenses or income shift as budgets should remain fluid and changes should be expected. When all is said and done, remind them that the objective of a budget is to ensure that they don’t spend more money than they earn.

Learning how to budget early in life is a great way to ensure that young people acquire the fiscal disciplines necessary to achieve financial success and avoid the pitfalls of creating unmanageable debt as adults.

Click here to see the best budgeting apps of 2015.

Kevin Kwiatek

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