How To Teach Your Kids To Budget

Today’s post comes from Kalen Bruce, founder of Freedom Sprout, who helps parents raise money-smart, non-materialistic kids. He’s a writer, husband, father of five, and war planner for the U.S. military. His writing has been featured in Simple Money Magazine, and on many publications, to include: Yahoo! Finance, CNN Money, The Penny Hoarder, and WiseBread.

How to Teach Your Kids To Budget

How did you feel about the word “budget” when you were a kid, and into early adult life? Did you think of it as the handcuffs of finances? Or did you see it as an opportunity to do more with your money? Or, if your parents never talked about money, maybe you didn’t even know the concept of a budget until you were an adult.

Regardless of how you were raised to view a budget (or lack thereof), you will have the single greatest influence over how your children view budgeting. And that’s important, because it means you get to mold whether they see it as a hindrance (like many people who are struggling financially see it), or whether they see a budget as the freedom to tell every single dollar where to go and what to do (as financially-free people see it).

So how can you teach your kids about budgeting without boring them to tears? It’s easy. You use teachable moments, everyday life, and things that motivate them.

Budgeting 101

While having your kids create their own zero-based budget may be the goal, it’s more of the endgame. They’ll get there, but you don’t want to sit a six-year-old in front of a zero-based PowerPoint presentation, unless your goal is to make him hate budgeting.

Your kids will grasp the full concept of budgeting over the course of their childhood, and by the time they move out, it will be easy for them to set up a zero-based budget. For now, something like basic envelope budgeting is easily taught. Our main goal here, as parents, is to teach the concept of controlling your money.

Budgeting is easier said than done. Even for adults. It sounds simple to assign a home to every dollar, but it takes time to get all the categories right, figure out exactly how much you spend in each one, and adjust accordingly. In my experience, when budgeting fails, it’s due to a lack of persistence. A few months of mismatched categories and overspending can derail the entire operation.

Not for your kids though.

Subtle hints and little lessons throughout their lives will make it easy to jump right into managing their own money. As your kids grow up, the lessons will get a little more complex, but since budgeting isn’t really a complex topic, they’ll catch on.

Budgeting for Preschoolers

Children who are five and younger will start understanding values and denominations, but don’t expect them to understand the full spectrum of budgeting a household income. The typical “give, save, spend” jars can be implemented at practically any age, but at the preschool age, the emphasis is best put on the importance of giving and saving a little, and the importance of spending the rest.

As parents, when we see our kids wanting to give or save a large percentage of their money, we want to encourage it, but sometimes that can backfire. Spenders need to learn how to save, and savers need to learn how to spend. We don’t want our kids to grow up hoarding money. Nor do we want our kids to give away everything they have, only to grow up and realize that they can’t continue that practice.

At this age, it’s best to making saving and giving visual. Get a large, clear jar for savings and let them see it filling up. When they give, have them do it in person. I’m a huge fan of online giving, but preschoolers need to physically see their giving in action.

As far as spending at this age, let them do it! I have a tendency to criticize every financial move my kids make, but as much as I think I’m helping, it would help them more to let them freely spend the “spending” category of their little three-category budget. I still give them guidance and advice, but their spending money is theirs to spend.

If they make poor purchases, let them see the results. It’s better to let them make poor financial decisions with a little cash, in a safe environment, than to let them wait until they’re adults to make the same mistakes on a larger scale.

Budgeting for Younger Kids

Once your kids start school, and start learning more math skills, it’s time to ramp up the budgeting… but not too much. Your kids should still enjoy it.

At ages 6-11, your kids have likely made some money mistakes. It’s hard to make serious mistakes when you’re five, but in their minds, their mistakes were a big deal, and hopefully they’ve learned big lessons.

Your kids are now old enough to start grasping delayed gratification by saving for big purchases. Before age six, they may have saved some money, but now they’re ready to save a couple hundred dollars for something big. Let them do this. It will translate to later saving for things like a car, and eventually, a home.

Kids are always little learning sponges, but on the financial side, it seems like ages 6-11 are some of the most formative years. They’re old enough to make their own spending decisions, given that they’ve already allocated their saving and giving money. They can start breaking things down into categories, but not too many.

If you pay your kids for work around the house, you likely pay them weekly, so it’s best to have them start their budget on a weekly basis. I’m not talking about creating a spreadsheet or using a budgeting app (though if they’re interested in that, go for it), I’m talking about a simple conversation.

For example, we’ll use an $8/week allowance, commission, paycheck, or whatever you decide to call it. An eight-year-old’s budget may look something like this:

Giving: $1

Saving (long-term – car, college, etc.): $1

Saving (short-term – Xbox, tablet, etc.) $4

Spending: $2

That’s easy for an eight-year-old to grasp. She can understand why she is doing each category, and she sees where each dollar is going.

Budgeting for Young Teens

Now we’re getting into a budget that looks more like an adult’s. Continue to encourage intentional spending, and tracking of every dollar. Continue to let them make their own decisions with their money, with your guidance (not your full control).

It’s time for the conversation about their first car… unless you had it already, which is perfectly fine. Every kid is different. I’ve had the car conversation with my four-year-old, because he was interested. One of my daughters, however, was 11 before she even gave it a thought. Though, now that they can see their car’s headlights at the end of the tunnel, they’re going to be more motivated to save for a car.

They may forego much of the rest of their savings goals to save for a car. Or they may continue as they have. It depends on their personality. It also depends on whether they’re responsible for saving for all of their car, or whether you’ve agreed to help or match their money. That’s your call.

Either way, it’s time to start thinking about an actual, written (or app-based) budget for them. Most kids enjoy this part at this age. If they don’t, don’t force it.

By this time, they’ve likely saved for some bigger goals in their short-term savings, and their long-term savings should be coming along nicely. The next step is pretty much adulthood (as far as they’re concerned).

Budgeting for Older Teens

Now they’re ready for all of that adult budgeting talk. If they’ve grown up knowing all about budgeting, it will be an easy transition when they leave in a couple years. Budgeting will just be part of their life. It will be normal, and natural.

Many financial experts suggest having your older teens start their first emergency fund with $500. This will be for college, or their early work life. The main idea is to encourage the concept of an emergency fund.

Tip: Grab this Emergency Fund Worksheet to help your teen understand the process. 

It’s also time, if you haven’t already, to fully explain the dangers of debt. Compound interest will either be their best friend or worst enemy. It’s their choice. Though, using a few charts, it will be easy to show them how to make compound interest work for them, not against them.

It’s crucial to teach your kids to invest at a young age, and if they’ve been budgeting their whole life, it will be an easy addition. Investing doesn’t have to start at 18, it can start as early as you want, but kids won’t start to grasp the concept of compound interest fully, until they hit their teens.

There’s no reason to keep the old-fashioned, manual form of budgeting. That may be the best way to learn, but budgeting is easily automated these days. Show your older teens how to do that, with a program like Mint or EveryDollar, depending on how automated they want it.

Over your child’s life, introduce each of the budgeting concepts slowly, and each one will be just as easy as the last. By the time your kid reaches his late teens, he’ll be ready to budget, and stick with it. It’s easy to stick with something you’ve done your whole life. Especially if you built up the habit gradually.

If you enjoyed this post, make sure to head over to Freedom Sprout and check out all of the resources Kalen has to offer. You’ll be happy you did!