Teaching Your Teen to Build a Budget

Teaching Your Teen Money Management: Building a Budget

A budget is an itemized estimate of anticipated income and expenses over a future period of time. It is used to track cash flow and set short- and long-term spending goals. Establishing and sticking to a budget is an essential life skill to achieve financial success. As a parent, you can help your teen create a budget that is simple and realistic. Begin by using paper and pencil or your teen may prefer to use a spreadsheet program, budgeting website, or app on their phone.

Step 1: Figure out how much money comes in.

Your teen's regular income may include pay checks, tips, their allowance, monetary gifts, and interest or dividends from their savings account. Have your teen add up what they receive in a month. This sum is their "Total Income."

Step 2: Calculate expenses.

Create expense categories, such as car, phone, savings, charitable giving, personal, entertainment, and food. Discuss which of these expenditures are "must-haves," or required expenses that must be paid first. Other categories are simply "nice-to-have." Your adolescent may know the exact amount needed for some of these expenses. Others may be an estimate based on their recent spending habits. Add up these figures to find their "Expense Total."

Step 3: Subtract the "Expense Total" from the "Total Income."

Your teen can now see whether they have enough to cover their expenses and if any money is left over. Any surplus can go to their savings account, be uses for "nice-to-have" purchases, or be carried over to the next month.

Step 4: Make adjustments.

Stress to your teen that their spending should not exceed their income. If their budget reveals that they are overspending, discuss ways to cut back or increase their income. Since the budget extends out over a period of time, you can also show your teen how making small purchases now will affect their ability to make a bigger purchase down the road. This will teach them that randomly spending money is not a good approach and it will encourage them to make wise spending decisions.