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 can benefit them throughout life. Here are some important talking points when it comes to teaching teen money management.
Why budgeting is important
The thought of budgeting scares many people — parents and teens alike. But the costs of not budgeting could be high: a lack of personal finance knowledge could easily amount to $10,000 or more over a lifetime.
The truth is, a budget is simply a spending plan. It teaches both teens and adults how to live within their means. And the reward for smart spending? You can have better control of your finances and you may be more likely to achieve the things you want to do and have in life. And living within a budget can help build a lifetime of lower stress and greater happiness.
If you’re a parent looking to help your teenager, these seven budgeting basics can help them create good financial habits.
1. Start with goals
You might think the key to good budgeting starts with dollars and cents. But actually, it’s best to start by helping your teen 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’s helpful for teens to record all expenses, large or small, for a month or two before creating their budget. Consider using a financial app to keep track, or make a list in your phone’s notes or a small notebook. This track record helps estimate expenses for coming months and ensure the budget is realistic. Additionally, most people are surprised to see how so many small items can add up so quickly.
3. Create the budget around the goals
Budgeting doesn’t need to be complicated. Many teens may like to use budgeting sites or apps. But paper and pencil or a spreadsheet also work. You just need something that will help you tally 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, cell phone bills, clothing, school supplies, and books. Discretionary expenses –“wants” versus “needs” –might include costs of going out with friends, entertainment, hobbies, sports, and gifts.
Whatever budgeting tool you use, it should 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, and adjust the budget accordingly.
4. Develop a savings habit
Every budget should include a line item for savings; it should be an essential part of teen money management. This item falls in the expenses category, but it’s one that could benefit your teen’s future.
Anytime your teen receives income, set aside a pre-determined percent for savings. A good starting point is 10 percent. When extra money comes in (from unexpected overtime or a gift, for example), build the habit of saving, instead of spending, the same percentage of that money as well. Then, when they want to take advantage of a great deal on a car, a post-graduation backpacking trip, or a down payment on an apartment, the funds could be there to cover it.
5. Stay accountable
Once the budget is in place, you and your teen 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 feel pushy to ask your teen, “Can you replace that lunchtime burrito with a sandwich from home?” But this type of discipline will help put them on the right track to budgeting, saving, and good financial management.
After using the budget for a few weeks or months, you and your child might want to modify their goals. Reality might mean the brand-new car becomes a reliable used one, 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 are often a debit card and an app. A debit card looks like a credit card, but it pulls money straight from a 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 should 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. Others suggest young adults 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 and it can be very detrimental where no teen money management skills have been instilled. If you do opt for a credit card for your teen, remember that every charge should appear in the budget, and every dollar spent has to be repaid. To manage credit responsibly, teens should be encouraged to keep the amounts charged low and pay off the entire balance every month.
Learning lifelong skills
Teens who learn to budget early on should be ahead of the game in the long run in terms of their money management skills. Of course, there’s always more to learn. Thankfully, understanding how to deal with debt, money, and planning for your future doesn’t need to be hard. To that end, we’ve developed a simple to follow guide to help you–and your teen–find the tools you need to move to a better financial future. Get started by downloading our free guide right now.
- Do Your Teens Understand Money? Here Are 10 Tips to Start the Conversation (CNBC)
- How Much Debt Is Too Much Debt? (Freedom Debt Relief)
- What to Teach Your Adult Child about Money (Forbes)