The one critical component to creating wealth is to live on less than you make.
Yet, as I am sure you know, this is not always easy to do.
One of the best ways to do this is to have and follow a budget.
So knowing this, if we want to set our kids up for financial success, the best thing we can do for them is to teach them how to budget.
The best time to teach them how to budget is when they are in high school or have a job.
How to Start Teaching Your Kids
The first thing you need to do is figure out how they are going to create and track their budget.
I highly recommend that you have them start with pen and paper, a legal pad is great for this as it already has lines! I recommend you start with paper as your brain makes different connections in your mind when you write something out with a pen and paper.
They will learn faster and have a more intimate understanding of budgeting by doing it on paper.
Once they have a basic understanding of the process they can move to an electronic format for doing a budget. I would recommend you wait at least six months before making this switch.
How to Actually Budget
How Often to Budget
First start with determining what time frame they are going to do a budget for. I would recommend you pick a time frame that matches their pay schedule. Thus if they have a job and get paid every two weeks, I would have them do a two week budget. If they get allowance once a week then have them do a weekly budget.
As they get more experienced you can have them try longer periods of time for more practice and complexity!
After you pick the time frame, have them create the first budget with the most recent paycheck. If this means you wait a week for them to get paid, I would recommend you do that so that the first go through they are not trying to estimate what the paycheck will be. Plus it will give you some of the numbers you need for taxes and other deductions.
Start with the amount of the paycheck as the income for the time period.
At the same time you have them do the current period budget have them create the next budget. This will be the only time you have them do two, this is to set them up to be forecasting the next couple weeks of income and expenses.
After the first budget have them estimate the number of hours they will be working and then estimate taxes. Don’t forget to keep in mind times not working due to sports, vacations or other busy times.
Next have them estimate what their expenses will be between now and the next paycheck.
Depending on what you have agreed to them paying for this may include clothes, gas, insurance, or entertainment.
Also have them create a list of things that they want in the future that may require savings. This might include prom expenses, a big school trip or just a nicer piece of clothing. This will allow them to see how much money they need to be setting aside for those big purchases.
Don’t forget to budget for savings for long term things like college and cars!
Finally have them subtract the expenses from the income. If this number is negative have them go back and reallocate! If it is positive, have them allocate the extra towards future purchases.
Teaching Your Child How to Manage a Checking Account
Make Changes During The Week
Now that they have a budget, it is important to remind them to make changes to it as new expenses arise. Budgeting only works when you follow the budget. However it does not have to be set in stone. They can make changes as things happen.
Remember they set the budget, which means they can change it. As long as they are not going negative, all is good!
Budgeting early in life is a great way to ensure they can create a budget and stick to it, thus setting them up for future financial success.