If there’s one basic skill your child needs to learn about money, it’s how to create a budget. It’s perhaps even more important than saving, because the budget shows your child how to distribute the savings he puts together and gives earnings true direction. Setting up a budget for your child isn’t much different than setting one up for yourself, except that there are likely fewer variables related to income and expenditures to consider.
Step 1: Figure out income.
Kids like adults, should learn to spend within their means. This is one of the main principles behind a budget: to prevent debt. Allowance is likely the only income many children have, but as your child matures, he might also get consistent money from simple jobs like babysitting or mowing lawns. Add these up on one page of a basic notebook.
Step 2: Figure out spending.
Especially early on, spending for kids is mostly in the “wants” categories. Items that might fall into this category would be a new video game or a music download. Later on, though, your child might have legitimate needs like money for the bus. In any case, have your child keep the receipts for everything he buys for a week.
Once your child has his receipts, have him identify what is a fixed or unchanging expense (e.g., lunch money every day) and what is changing (e.g., the comic book bought on impulse), separating the receipts into two piles for the two categories. Write down the fixed expenses in a column on one notebook page and add them up. On the same page, write down the changing expenses in another column, adding them as well. Have your child tally the two results for an idea of total spending.
Keep in mind, some spending might not have a receipt but still needs to be included in the spending totals. Saving, for example, takes some money from income, but doesn’t require a third party or vendor. Don’t use savings, charity, education or similar goals as changing expenses, because it sends the message that these areas don’t need to be consistent, when in fact, they should be to give predictable totals for the future.
Step 3: Check if there’s enough money for real needs.
Have your child subtract his fixed expenses from his total income. A positive number means that your child has enough money to meet his true needs—that’s good! The changing expenses total shouldn’t be more than this positive number. If it is, that means your child is overspending and needs to try to cut back. A negative number when you subtract fixed expenses from income means he’s not making enough money—he might need some additional help from you such as an allowance raise or the chance to earn more money through chores. If he already has a negative number here, you child definitely shouldn’t be spending money on anything extra.
Step 4: Repeat and tweak.
To get an idea of whether the basic budget your child has created will work over time, have him repeat Steps 1, 2 and 3 for at least a month. Overspending in one area for a single week might not be a problem, but if your child sees that the overspending happens every single time, then that’s a good clue that he needs to change some habits or reallocate some of his money.