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Family Finances: Teaching Kids About Budgeting

George Grombacher April 19, 2022

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Family Finances: Teaching Kids About Budgeting

Why do so many Americans struggle financially (two thirds of us are living paycheck-to-paycheck)? Is it because we don’t keep a personal budget? Maybe.


Is it because we don’t understand the principles behind budgeting? Probably.


While budgeting may not be the most exciting personal finance topic, it may be the most impactful.

Beyond just helping your kid create a plan for their money, budgeting gives you the opportunity to teach a lot of important first principles. When you impart this knowledge, you position your child for long-term financial success.


I’ll go through the difference between wants and needs, the four first principles to emphasize, and then some practical ways to teach your kids budgeting based on their age.


Here’s what we’ll cover:


  • What is budgeting


  • Wants vs needs


  • A sacrifice is required


  • Spend less than you make


  • Don’t run out of money


  • If you can’t pay cash, you can’t afford it


  • How to do it


Let’s get started.


What is budgeting


Simply put, a budget is a plan for your money. It is one of the most foundational and important steps to financial success. Without a budget, you have no way of knowing whether or not you’re doing the right or wrong things with your money.


It helps us to make decisions on how we spend, save and invest. It tells us if we’re on track financially over the short and long-term.


Following a budget lets us know if we can afford things like going on vacation, buying a new gadget, or investing in Bitcoin.


There’s not a right or wrong way to develop and maintain your budget. Some people prefer spreadsheets while others use apps.


The key to budgeting is deciding how you’ll keep yours and consistently maintaining it.


Kids and budgeting


It’s important to teach kids that money doesn’t grow on trees, and that your family has a finite amount of it. Because of that, you need to prioritize how you spend it every month. This is were wants and needs come in.


Wants vs needs


Understanding the difference between wants and needs is fundamental financial knowledge.  Simply put, needs are things you can’t live without. Wants are things that accentuate our lives.


Your ability to recognize this difference and to prioritize your needs over your wants will be a major driver to your long-term success. An inability to differentiate may prevent you from becoming financially successful. This may also be true for your kids.


Your child will need your help in recognizing the differences between them, and there are certain things which can fall into both categories. The more you can talk openly and honestly, the better.


Needs are things you literally cannot live without, which include


  • Housing


  • Transportation


  • Food


  • Utilities


  • Insurance


  • Clothing


  • Medical care


Wants are things that accentuate your life but could certainly live without, which include:


  • Luxury accommodations


  • A fancy car


  • Eating out


  • Designer clothing, shoes, accessories


  • Hobbies, sports, gaming, fun activities


There are real-time learning opportunities all around us. Talking with your kids about how much it costs to maintain your home is a great way to help them understand budgeting. Teach them that the starting point is to take care of your family’s needs, and then to focus on other desires like wants.


Also, don’t forget to talk about paying off debt, saving and investing money. If you’d like to dig deeper into this, check out this post on the 50/20/30 budget guide.


A sacrifice is required


Helping your kids learn how to delay gratification is really, really important. We live in an instant society where you can click a button on your phone and have something arrive at your house in minutes. While that’s great if we’re hungry, it’s not great for our personal financial situation.


Delaying gratification means we’re giving something up today, for something better in the future. Think of it in terms of retirement planning; if we’re not able to make sacrifices today, we won’t ever be able to stop working. We’ll be stuck in the rat race forever.


When your kid wants something that’s expensive, resist the impulse to simply buy it for them. Instead,  help them put a plan together (a budget) for saving up and buying it.


Spend less than you make


With 2/3rds of Americans living paycheck-to-paycheck and saddled with $6,000 of credit card debt, we’re not good at following this rule. And as someone who fell into both of these traps in my 20s, I know how easy it is to do.


I also know that I’m highly interested in helping my kids avoid these mistakes.


Living within your means is at the heart of budgeting. It’s knowing how much money you earn, and creating a plan for your spending, saving and investing. Paying your kids a weekly salary will help you to teach them about this (more on this later).


Don’t run out of money


I remember running out of money, do you? Perhaps it was pre-credit cards, or perhaps I just didn’t have one, but when I ran out of cash, my spending stopped.

Today, it’s harder for us to run out of money because we’ve got credit cards and overdraft protection. While safety nets are good, they’re better when they come in the form of cash.


Teaching your kids about the importance of an emergency fund is really important. A fully funded emergency fund provides financial security, which then sets you on the course for financial prosperity. You can learn more about the steps for making that happen in this post.


If you can’t pay cash, you can’t afford it


I use credit cards correctly. Meaning, I pay the balances off every month. As I mentioned earlier, this wasn’t always the case.


If you’re in the habit of rolling over credit card balances from one month to the next, please stop as soon as possible. Not only is this hurting your ability to get ahead financially, you’re also settings a poor example for your children.


Once your kids are old enough to know what credit cards are, it becomes important to teach them about how to use them properly. Talk to them about “points” and the benefits credit cards can provide. And also tell them the dangers of misusing them, and how many Americans struggle with high interest debt.


Fundamentally, if you can’t afford to buy something with cash, you shouldn’t be using a credit card to buy it. Once you have the cash, by all means pay with a credit card to take advantage of the points, and then use the cash to pay off the card.


How to do it


I advocate you pay your kids a weekly salary. It’s not an allowance. This is money they earn by completing their jobs and responsibilities.


My suggestion is that you begin with a $5 weekly salary.  I break it out into three categories, Spend, Save and Give. $2 for Spend, $2 for Save, and $1 for Give.


While there are a lot of great apps and technologies for doing this, I think it’s important to give them cash, and to put the money in three clear jars.


You’re more than welcome to give your kids more than $5. What’s important is the breakdown of 40% of the salary to Spend, 40% to Save, and 20% to Give. Even if you start with $5, you’ll eventually increase it over time.


I suggest you designate one day and time every week for paying the salary. That way, you won’t forget to do it. We do it Sunday morning.


Ages 3 to 5


When your child tells you they want a particular item that costs more than they currently have, this is a great opportunity to plan and develop a budget for buying it. For example, my son saw another child at the park with a glider. He told me he wanted one and we researched how much it costs. From there, we put a plan together for how many weeks it would take him to save enough of his salary to buy it.


This can also be an opportunity to create a “job board” which can provide the child the opportunity to earn extra money if they desire.


Ages 6 to 12


If you’ve not already begun doing so, now is the time to involve your children in your family budgeting process. A great place to start is your monthly grocery budget. You can go through it with them, write out your shopping list before going to the store, and talk about why you make the buying decisions you make.


I encourage you to share as much of your household budget as your child is interested in learning.


Ages 13 +


Now is the time to be transparent about your household budget. Involve them in your monthly or quarterly budget conversation. Put together a personal budget based on their life; think car insurance, activites, clothes, technology, entertainment, etc.


Closing thoughts


While you may not feel like you’re in a position to talk with your kids about budgeting, the more you do it, the more comfortable you’ll become. Keep those first principles in mind and look for opportunities to talk about and reinforce them.


And remember, personal finance and budgeting is not a game of perfect. You’ll slip up from time to time, the key is to get back into a good routine as quickly as possible.


Your kids will benefit greatly from your efforts!

If you’d like to help your kids get good with money, check out our Teaching Kids about Money course. 

You can access our Get Out of Debt, Goals and Values courses at no-cost.

Check out our Get a Budget course, and if you’re ready to take control of your entire financial situation, our DIY Financial Plan workshop could be a great fit.


Stay up to date by getting our monthly updates here.


Check out the LifeBlood podcast as well.


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