Teaching your teen how to create a budget is more than simply showing them how to keep track of their income and expenses. Budgeting is a skill that will serve them both personally and as an entrepreneur. They will see firsthand how planning ahead where their money goes can help them achieve their goals!
There are thousands of articles, games and apps* online offering to teach your children how to manage their money but the ultimate in financial education for kids of all ages is running their own business. Kids (and adults!) always learn best from hands-on experience. The rewards resulting from good money management creates a satisfaction that books or parents often fail to convey. Budgeting goes from knowledge quickly forgotten to a fun, meaningful adventure, and ideally a life-long habit!
Even if your teen is taking a financial literacy class in school, don’t assume the concepts are sinking in. The painful experience of running out of money at the end of a month is a tough lesson. As long as someone doesn’t step in and rescue them, forcing the denial of something they want is a priceless lesson.
Money management, or budgeting, serves as the basis of all other financial lessons. How will kids learn other concepts like giving, saving and investing unless they have money leftover at the end of the month to work with?
The #1 Argument against Budgeting
Entrepreneurs are notorious for not budgeting due to their unpredictable income. This is also why 3 out of 4 businesses fail in the first year! The first lesson in budgeting a variable income is how to estimate income and expenses. This is a valuable lesson for anyone that has an inconsistent income.
Begin with Setting Goals
Your teen may not be forward-thinking enough to set many long term goals, so begin with short term goal-setting. It may be as short term as saving enough for going someplace this weekend, or an outfit or some shoes they’ve been wanting. These kinds of goals can be very motivating!
Encouraging the Entrepreneurial Mindset
If your teen already has their own business, you can help them by reviewing and offering advice on their current financials. They may be doing fine, but it’s always nice when they hear you tell them so! If they are struggling, they might be open to suggestions!
If a business isn’t in your teen’s near future, explain how their life can be managed like a business. If they don’t have any income, perhaps their allowance can be their income for now.
All budgets begin by tracking income and expenses. This can be as simple as putting all receipts into a shoebox. If the expense doesn’t offer a receipt, write it on a piece of paper and put it in the box. If that seems too primitive to your smartphone-carrying teen, there are many free apps they can use to track their expenses. There are even apps that will track your mileage simply by having your phone with you. It’s important to find something that suits them so they can form the habit of tracking their finances.
Emphasize the importance of recording every expense however small, including gifts and money received from you. At the end of the month, create a spreadsheet by hand or online. Open Office* has a free spreadsheet program that is easy to learn. Categorize the expenses, and their totals will probably surprise them! Most of us have no idea how much we really spend on certain things!
To encourage their continued honesty in reporting expenses, do your best to avoid criticism of what they spend their money on. I found it helpful to try to look at their totals as if it were someone else’s child. You might even believe this isn’t your child when you see their list of expenses!
Discuss with them the difference between expenses they need and those they want. Once you are sure they understand the difference, ask them what expenses could be reduced and what they would like to change in the future to achieve their goals. Make sure your time together is pleasant with no scolding or lecturing, even if you think it’s needed! This is a lesson on how to form the habit of managing their money, not lifestyle choices. (Save that for another time.)
The Business of Life
After 2-3 months of tracking their expenses, if you are paying their allowance for this project, decide together on a monthly amount based on their total needs only. To cover the expenses for their wants, help them find ways to earn that money. Encourage earning enough to have a small savings account, as well as giving to a cause they choose.
Naturally, take into consideration how much extra money they need each month with the average amount of spare time they typically have. Remember, this is not a punishment, but a learning project they can feel good about. If they have an unusually heavy school load leaving them little extra time, you can make an agreement to pay so much for ‘A’s’ or ‘B’s on tests or big assignments.
If working a part time job or starting a small business is not possible there are other ways you can help them earn extra money. Post a list of chores they can do to make extra money and what you are willing to pay for each job. Don’t discourage negotiation! You could suggest jobs that neighbors or relatives may need done and discuss fair amounts to charge for doing them. Put as much of this planning in writing as possible. You’ll be glad you did!
Let’s Make It More Entrepreneurial!
If you are paying them to do extra chores for you that require using your equipment and supplies, consider creating a pricelist for those items. Rental fees for the mower by the hour, a flat fee for water and soap for washing the car are now expenses for their monthly list. You could suggest they hire a sibling or friend to accomplish more in a shorter time period. If they don’t care for your suggestions, remind them that they can always get a job or sell something they own or make.
NO Bailouts!
Once you’ve made a plan with them, stick to it! You can let them know you are always there for support and advice, but not handouts. If the need for extra money is unavoidable, it should be offered as a loan with terms you both negotiate. Let their “credit” be based on their previous repayment history. Help them develop a plan to have enough money to make payments on your loan as well as ways to avoid repeat occurrences.
Reward a well-thought-out plan that has shown discipline in execution each month. To encourage saving money leftover at the end of the money rather than spending it, offer to pay them interest on that money. You could also give bonuses for jobs well done and on time.
This project may take more time to begin than you think you have, but consider it a valuable investment that has potential for great return! Your child will never forget the time you gave them.
Kids may not see the immediate benefits right now from your efforts, and you may even have to plow through oceans of complaining and grumbling. It may be many years before they see the value in the time you’ve invested in teaching them good money management skills. Your reward will come when you see the difference it makes in managing their lives.
*Resources:
Apps:
https://www.everydollar.com/
Games:
http://practicalmoneyskills.com/games/
https://www.learn4good.com/games/tycoonbusiness.htm
Open Office:
https://www.openoffice.org/download/
http://www.moneyandstuff.info
http://bizkids.com/
