1. Teaching Financial Literacy to Teens: Introduction
  2. Teaching Financial Literacy to Teens: Making Money
  3. Teaching Financial Literacy to Teens: Budgeting
  4. Teaching Financial Literacy to Teens: Credit and Debt
  5. Teaching Financial Literacy to Teens: Cars and College
  6. Teaching Financial Literacy to Teens: Account Reconciliation
  7. Teaching Financial Literacy to Teens: Investing
  8. Teaching Financial Literacy to Teens: Moving Out
  9. Teaching Financial Literacy to Teens: Conclusion

A budget, sometimes called a "spending plan," is an outline of anticipated income and expenses that individuals and families can use to track actual cash flow and set spending goals. Making a budget gives teens an important financial tool that can help them:

  • Plan for expenses. Short-term expenses happen in the next month; mid-term expenses occur in between one month and a year; long-term expenses are longer than one year.
  • Cut spending. A budget shows just how much money an individual spends on certain items. People who see this might have an incentive to cut spending in certain areas.
  • Spend wisely. If your teen is spending more than he or she earns, something has to change – the teen will have to earn more, spend less, or both. For a teen who earns more than he or she spends, help figure out a plan for the surplus (e.g., spend, save, invest).
  • Save for future goals. Help your teen "find" the money to set aside for future expenses. With a budget, you can identify areas of extra spending and reallocate that money towards a future goal.
  • Develop lifelong money management skills. It’s priceless to learn as a teenager how to save for a goal. For most people, this is not as simple as setting aside a certain chunk of money each paycheck. It usually involves making spending choices and prioritizing savings over wants. 

Creating a Budget

A budget is an outline of income and expenses. To create a useful budget, you need to make accurate and realistic projections for how much money is coming in and how much money is going out. Typically, expense estimates are based on the past one or two months of spending, so it’s a good idea to have your teen record all expenses – even the tiny ones – for a couple of months before sitting down and developing a budget. This helps ensure a realistic budget.

Most teens prefer to use a budgeting site or app like Mint.com to make a budget, but you can also do it the old-fashioned way with paper and pencil or by using a spreadsheet program. The best method is the one your teen is most enthusiastic about: You want to make the budgeting process as fun as possible so your child has the motivation to stick with it over the long term. Keep in mind, too, that as your teen becomes more adept at using budgets, he or she may choose a different method. That's OK; just keep the process rolling.

Income and Expense Projections

Your teen's budget should include income projections and expense projections. 

Income projections should include all sources of income, such as:

  • allowance
  • wages
  • tips
  • bonuses
  • gifts
  • interest and dividends
  • non-employee compensation, such as income earned from freelance work (1099)
  • stipends

Note: Your teen can either include after-tax income projections, or before-tax projections with a corresponding expense category to cover taxes.

Budgeting for expenses is usually a bit trickier. Some expenses are known – such as the premium for car insurance (or your child's share of this expense). Others require your teen to make a best guess based on history (this is where writing down a few months of spending can be helpful).

Your child's expense categories will be unique; the important thing is to help your teen set up enough separate categories to be useful (one category called "bills" won't help your child figure out where his or her money is going; be more specific). You may find that the categories will need to be adjusted in the future. Some common expense categories include:

  • car – loan payment, insurance, gas, maintenance
  • mobile phone
  • entertainment – movies, music, concerts
  • food – groceries, snacks, dining out
  • personal – clothes, toiletries, haircuts
  • rent/mortgage (if applicable)
  • savings
  • sharing – donations to a favorite charity or cause

Your child may have a fixed amount of income each month, or it could change throughout the year. For example, many teens work extra hours (or even multiple jobs) during the summer months when school is not in session. Similarly, spending is likely to differ throughout the year (perhaps a down payment on a car?). Creating a budget that addresses each month can deal with the fluctuations in income and expenses that occur throughout the year. Your teen may create a separate budget for each month, or a new column for each month as part of a master budget.
 
To create the budget, have your teen enter his or her estimated income, plus expenses for payments they have to fit in the budget (e.g., car payment, gas, mobile phone, saving for college). After those expenses have been accounted for, your teen can allocate the rest towards discretionary spending.

The first try at the budget might look like this:

In this example, several months are shown to illustrate how income and expenses differ from month to month (the rest of the year would be added as time passes). Your child may want to start with an overall estimate for the entire year (known as an annual or yearly budget) or focus only on each upcoming month – or a combination of the two. (For more, see The Complete Guide to Planning a Yearly Budget.)
 
The last row (Income – Expenses, highlighted in yellow) shows if the budget is balanced for the month. If any month ends up in the red, your teen will have to revise the discretionary spending to balance the budget.

Any surplus from one month can be reallocated during that month (for example, by increasing savings for the month), or carried forward to the next, as shown in this adjusted budget, below:

Without a budget, the teen in this example might have come up short in one or more months. With limited income, a budget will be tight. Expenses such as the car loan, insurance and cell phone, which can’t be changed, have to be paid first. Any extra money can then be divided among the other categories, reallocating as necessary until expenses fall within the income constraints.

The first budget may be an eye opener for your teen: A budget really enforces the fact that money is in limited supply (for most people) and that, as a result, you have to make spending choices. It may be tough for your teen to realize that he or she can only go out to dinner once during February, for example, but it will be a lot harder to not have the money to pay a required bill, such as the car insurance. Planning, however tough it may be at times, helps ensure that money is intentionally – and wisely – spent. 

Understanding Inflation

Inflation is the steady increase in the price of goods and services. It’s usually measured in terms of a specific annual percentage, as in the news headline, "Fed Should Abandon Its 2% Inflation Target.”
 
Inflation helps explain why things cost more over time. Historically, inflation has averaged about 3% each year, although there have been times when inflation reached double digits (such as during the 1970s and early '80s). Your child has probably heard the term "inflation" in the news, but may not understand how it affects prices for the goods and services he or she buys. (For more, see What You Should Know About Inflation.)
 
There are two points to make: One is that inflation can directly affect buying power. Assume your teen earns $50 per week through allowance and odd jobs. If inflation is at 3%, after one year your teen would need $51.50 to be able to buy the same goods and services that last year's $50 could buy. The U.S. Bureau of Labor Statistics has an online calculator that may be useful when explaining inflation to your teen. You and your teen can enter a dollar amount and select two years to find out the relative buying power. For example, you can find out that $500 in 2007 has the same buying power as $591.92 in 2017:

 

Calculator courtesy www.bls.gov.

The second point to make is the relationship between inflation and salary increases. If your teen has a job, ideally his or her wages will increase more than the rate of inflation. For example, if inflation is 2%, any salary increase should be at least 3% so it's not just keeping pace with inflation (in this case, it really isn't a pay increase at all because buying power would be decreased). (For related reading, see 9 Common Effects of Inflation.)
 
Budgeting should take inflation into consideration: Many of the goods and services your teen is accustomed to buying may increase in price next year as a result of inflation. Make sure your child understands this concept so he or she can plan accurately and avoid going over budget during the year.

 

 


Teaching Financial Literacy to Teens: Credit and Debt
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