Don’t forget to include your children when planning a family budget. When you work with them to make a comprehensive family plan that they can understand, you not only account more fully for all your expenses, but you also teach them valuable lessons that will set them on a path toward a sound financial future. What could be more priceless than that?
Explain the Necessity of a Budget
While examining the state of your retirement fund may be enough to convince you of the need for budgeting, your children will likely be motivated by very different goals. Encourage them to think of things they have wanted to buy in the past but might not have been able to afford themselves or convince you to purchase. Young children may dream of a large toy, while teens may have visions of making their first car payment. When they come up with the goals themselves, understanding the value of budgeting will come naturally.
Create the Budget
When it comes to creating a budget, Barbara Weltman, author of The Complete Idiot’s Guide to Raising Money-Smart Kids, cautions, “Don’t set up a budget for your child; let her work through this task herself. The budget process is an invaluable experience. If you tell her what she’s got to spend on this or that, she’ll never learn how to make smart money decisions on her own.”
Weltman splits the process into three parts:
1) Create the Budget Period and Categories
Younger children may be able to focus on only a short timeline, so a budget period of a week is a great start. For older children receiving paychecks, the weekly or bimonthly pay period is a logical choice.
When setting up categories, first teach your children the difference between fixed and variable expenses. Fixed expenses might include after-school activities or phone bill charges. Variable expenses can include personal shopping, transportation and gifts for friends’ birthdays. It is important to create a separate category for savings, because planning to save whatever’s left over often means that none will be.
2) Make a Spending Plan
Have your child designate a certain amount of money that will be spent on each expense category in the chosen time period. Make sure that these do not add up to more than the child’s allowance or paycheck.
3) Follow Up with Necessary Adjustments
The final step involves remaking the budget in the event that income or expenses change. This teaches your child to keep a close eye on finances, which are always changing, and ensures that the budget remains sound.
Keep in mind that while you may use Excel or Quicken for your budget, pencil and paper may work better for younger children. Not only will they feel more in charge of the situation, but they also can keep the page taped up somewhere visible to refer to in the future.
Follow Through with Continued Financial Learning
This year, the popular budgeting website Mint.com worked with the President’s Advisory Council on Financial Capability to form the “Money as You Grow” learning tool for children and their families. Beth Kobliner, one of the developers of the teaching aid, says it “aims to educate children about money and distills the ‘greatest hits,’ if you will, into 20 age-appropriate lessons and corresponding activities designed to influence kids’ financial behavior.” After you’ve worked with your children to set up their budgets, helping them go through some of the learning modules will teach them to tackle the financial tasks that materialize over time. The tool is available at http://moneyasyougrow.org/.