Almost everyone could use some help with financial education from time to time. It’s especially important for young people who are just learning to manage money. For teens, creating and using a simple budget is a key “Personal Finance 101” skill that will benefit them throughout life.
Why budgeting is important
The thought of budgeting scares many people (parents and teens alike). The truth is a budget is simply a spending plan. Planning where your money will go is the best way to get control of your money. The reward for smart spending? You’ll be more likely to achieve the things you want to do and have in your life.
Budgeting teaches teens – as well as adults – how to live within their means. Even better, you can learn to live below your means, so you’ll have something left for a rainy day or for some fun.
Learning to not spend more than you have can build a lifetime of lower stress and greater happiness. If you are a parent looking to help your teenager, these seven budgeting basics will help them create good financial habits.
And the costs of missing out on these key budgeting skills are high: A lack of knowledge of personal finance amounts to $10,000 or more over a lifetime.
Budgeting for beginners: How to get started
1. Start with goals
You might think the key to good budgeting starts with dollars and cents, but that’s actually not ideal. The best way to start is by listing goals. A parent or other trusted adult can help teens identify short and long-term goals. These goals may range from paying a monthly cell phone or auto insurance bill to buying sports or music gear, or saving for college. After all, whether driving or budgeting, it’s hard to get somewhere without knowing where you want to be.
2. Track spending
It can be helpful for teens to record all expenses, large or small, for a month or two before creating the budget. This track record will help estimate expenses for coming months. It will also ensure the budget is realistic. Logging all purchases can be a learning experience in itself. Most people are surprised to find how much they spend each day on small items. Use a financial app to keep track, or make a list in your phone’s notes or a small notebook.
3. Create the budget around the goals
Budgeting doesn’t need to be complicated. Many teens may like to use budgeting sites or apps. Paper and pencil or a spreadsheet also work. For a simple way to get started, download our free budget worksheet. The budget worksheet will guide you in tallying all income and expenses.
For teens, monthly income may include earnings from a part-time job or an allowance. Expenses might include car payments, insurance, gas, vehicle maintenance, a bus or transit pass, or cell phone bills. Some teens may have expenses for clothing, school supplies and books. Discretionary expenses – often described as “wants” versus “needs” – might include costs of going out with friends, entertainment, hobbies, sports and gifts. The spreadsheet will subtract expenses from income. If the bottom-line number is negative or doesn’t help your teen achieve their goals, help them figure out how to increase income or reduce expenses. Parents or another trusted adult can help adjust and make these changes to the budget.
4. Develop a (savings) habit
Make sure to create a line item in the budget for savings. This item falls in the “Expenses” category, but the good news is that it’s an expense that will benefit your teen’s future. Anytime your teen receives income, whether from a regular job, allowance or an occasional gig, set aside a pre-determined percent for savings. A good starting point is 10 percent. When extra money comes in way (from unexpected overtime or a gift, for example), build the habit of saving, instead of spending, the same percentage of that money. Then, when your teenager wants to take advantage of a great deal on a car, a post-graduation backpacking trip or a down payment on an apartment, the funds will be there to cover it.
5. Stay accountable
Once the budget is in place, parents and teens can review and update it together on a weekly or monthly basis. Look at where money goes and where it’s possible to cut back. It might sound cliché to ask your teen, “Can you replace that lunchtime burrito with a sandwich from home?” But this type of disciplined choice will put them on the right track to budgeting, savings and good financial management. After using the budget for a few weeks – or months – you and your child might want to modify the goals set using the same free budget worksheet. Reality might mean the brand-new sports car becomes a reliable used sedan, or the cellphone plan becomes part of a family plan. In the process, they will be learning how to spend smartly.
6. Test-drive plastic with a debit card
A few generations ago, financial tools may have referred to check registers; today, these often are a debit card and an app. A debit card looks like a credit card, but it pulls money straight from your checking account. If the money isn’t there, the charge is denied. Many parents (and teens) are more comfortable with kids learning to successfully use a debit card before considering a credit card.
7. Use a credit card wisely – if at all
Older teens can approach credit cards cautiously. Applicants under age 21 need an adult co-signer or proof of adequate income. Some families believe it’s worthwhile to co-sign so that teens, particularly those in college, have a credit card for specified expenses. On the other hand, many experts suggest students wait until age 21, and learn to use credit cards independently.
A credit card can be a great convenience, and it can help build a credit profile – but it isn’t a license to spend. If you do opt for a credit card for your teen, remember that every item charged must appear in the budget, and every dollar spent has to be repaid. To manage credit responsibly, teens should keep the amounts charged low, and never carry a balance.
Learning lifelong skills
Teens who learn to budget will soon be ahead of many adults in terms of their money management. Learning the basics will help them learn to differentiate between wants and needs. These simple terms translate into lifelong skills that will ultimately lead to financial freedom.