Most kids have a knack for believing that money grows on trees. After all, for years they have watched a machine at a bank hand you $20 bills whenever you need them. When you are purchasing items at the store, they have watched you swipe a magical plastic card on a machine by the cashier.
But now the time has come for you to burst their monetary bubble and start talking to your kids about the reality of money. One of the best ways to do this is to discuss the importance of a budget and start encouraging your kids to use this concept with their own money. Here are a five tips for starting this important financial conversation:
Determine an Income
To properly determine a budget, you have to have a good idea of how much money is coming in. Ask your child to tally up his monthly income. This can include allowance, money earned from jobs like babysitting or mowing the lawn, and monetary gifts received for birthdays or holidays.
Talk About Necessary Expenses
Next, go over your child’s “bills” to see how much money they are spending every month. This often includes money that should be put into savings, and for tweens and teens, contributing to or paying a cell phone bill, car insurance, gas, and clothing. Total up these amounts and then have your child subtract the expenses from their monthly income. This will help illustrate whether or not your kid has enough money to pay for needed expenses as well as how much is left over.
Practice Saving for Something They Want
Budgeting goes beyond having enough money to cover the “needs.” You can also teach your child how to save for the “wants.” A great and common example of this is the latest and greatest smartphone that your son or daughter simply has to have. For example, if your son or daughter is begging for an iPhone 6s, use this as a moment to teach about budgeting. Explain to your child that he or she can save up the money ahead of time or look at payment plan options. For example, T-Mobile has a payment plan for the iPhone 6s that is around $27 a month. Go over the pros and cons of waiting to save up for something that can be purchased outright versus getting the desired item now and paying it off over time.
Show Them Real Life Examples
To help bring home the importance of budgeting, talk honestly about some of the things you budget for on a regular basis. You don’t have to get too personal or disclose too much financial information, but consider letting your child know how much you set aside each month for groceries, the electric bill, eating out and car insurance. Your child might be surprised to learn that you actually pay the garbage people to pick up your trash or how expensive it is to feed a family of four. Also, when you are saving up for bigger things like a vacation, discuss how airfare, rental cars, hotel rooms and souvenirs really add up. Also talk about how much money you will be setting aside each month to pay for summer vacation—it will likely be an eye-opening experience.
Use Apps to Bolster Your Lessons
Most kids are already savvy when it comes to apps, so you can use this skill to your advantage when discussing budgeting. Benzinga has a list of the top 10 personal finance apps for teens. Download a few and check them out with your child. For example, Toshl Finance is a free app that helps tweens and teens track expenses and set a monthly budget.