Budgeting is one of the most important skills a teen can learn. With the summer downtime, now might be a good time to dive into deep discussion with your teen on how to budget. Instilling the lessons early and learning how to budget when they get their first job can help start them off on the right path to making good financial decisions and help avoid future common financial mistakes.
While many teens are earning income for the first time, the change in their finances may be an overwhelming and exciting opportunity. It is vital that they realize with these new opportunities, they also have new responsibilities.
The first layer of the budget process is the understanding of why to budget. Life isn’t always simple, but having the knowledge to help create financial security through budgeting and mapping out a plan with finances helps layout the roadmap that will impact their goals.
Before diving into budget discussions, talk with your teen about wants versus needs. An understanding in the difference will help in budget discussions. This helps teach them how to control impulse-buying. Help them also to understand how to make tradeoffs such as choosing less expensive alternatives.
This is also a good time to talk to your teen about credit cards. If they haven’t already received credit card offers in the mail, they will. It is best to talk to kids about controlling credit card spending and also the importance of building up a credit score. Educate them on how if a bank gives you money, how likely are they to pay it back? Detail out how this process is how banks determine if they will loan out money and about credit card limits. In addition, touch on the overall credit score and how it will impact their future larger item purchases such as a car and a house. A good touch point is how paying off the balance in full every month helps build a stronger credit score, since it shows the bank they are able to repay the loan and to do so quickly. Instill on how bad decisions today, will follow them for a while.
How Should They Budget?
Helping guide your teens on the importance and understand the values of budgeting will help get them started on the right path, will reduce stress in their lives and help them reach their goals faster.
Teens may be intimidated by the prospect of creating a zero-based budget, but it doesn’t have to be complicated. Here’s a simple budgeting plan:
First, they should add together all of their income sources for the month, including paychecks, additional financial support from family or side neighborhood jobs that might earn extra cash from.
Next, they should list their expenses they have for the month. Here are a few items they may want to consider including:
- School fees
- Food Clothing
- Emergency fund/savings
After that, they should add their total expenses and subtract that number from their monthly income.
If they have money left over, discuss plans to add those funds into a savings account. If there is not any money left over, discuss how to either to find a way to make more income or cut expenses. Instilling the importance that saving allows them to have money, even when they don’t need it. The opposite and more stressful is needing cash and not having it.
Making a budget seems difficult, but it doesn’t have to be. It’s also important to remind your teen not to be discouraged if their budget doesn’t go as planned the first month. It’s normal, and, after a few months, they’ll work out the kinks.