Making a budget can be quick, easy, and simple. No need to gather a bunch of documents. With the 50/30/20 method any beginner can master budgeting. And the great thing is the method can be adapted to your child’s financial goals.
Let’s get ready by exploring how to set money goals.
1. Set Financial Goals
Budgeting begins with setting goals. Budget goals can span many areas in personal finance. Some of these areas include:
- Earning an income
- Saving money
- Spending intentionally, and
- Reducing debt
So how can you help your child set good goals?
By making the goals SMART.
What are SMART Goals?
SMART Goals is a handy tool for setting goals, especially with money. The SMART goals acronym stands for:
- Specific – What do you want to do?
- Measurable – What data (numbers, metrics, evidence) will show that you’ve reached your goal?
- Achievable – Can you do it?
- Relevant – Why is this important to you?, and
- Time-Bound – When is it due?
How to Write a SMART Goal
Now, let’s consider the following goal:
I want to save money.
Is it SMART? Let’s find out.
- Specific – Yes, this goal is specific about “sav[ing] money.”
- Measurable – No, it doesn’t include any numbers or metrics.
- Relevant – No, it doesn’t state why this goal is important.
- Achievable – No, we need more information to know if this goal can be achieved.
- Time-Bound – No, it doesn’t have a deadline.
From this assessment, the goal can be improved. Consider the following which improves the original goal by adding the SMART elements:
Making financial goals SMART will help your child focus their financial efforts. As your child makes their budget, their goals will also shape budget priorities.
Next, let’s determine the budget period.
2. Select a Budget Period
The budget period determines how long your budget can be used for. A budget period has two defining features:
- A beginning date, and
- An end date
The beginning date represents the first day your budget is active. Whereas the end date represents the last day your budget can be used. Think about the latter as an expiration date. Once a budget passes the expiration date, a new budget needs to be created.
Common periods in budgeting for kids are:
- Weekly
- Bi-weekly, or
- Monthly
When choosing a budget period, your child should keep the following in mind:
- When do I get paid?
- Do I have enough savings?
- How much time do I have to make a budget?
Let’s look at each of these in more detail.
When do I get paid?
When your child is paid may make a difference in their choice of a budget period. For example, if a child gets paid once a month, they will need to manage their resources for that time. As such, it makes sense to set the budget period to a month to match the payment timing.
Perhaps, your child is paid as chores are performed. If this is the case, their income may vary more than fixed payment schedules. It may be helpful to use shorter budget periods, like weekly or bi-weekly to help manage the unpredictability of payments.
Do I have enough savings?
If your child has an emergency fund, they are better prepared to manage money, or budget, over longer time horizons. However, if they don’t have much savings, they may benefit from considering a short budget period. This will help them manage their money tightly, while building their savings.
How much time do I have to make a budget?
How much time your child has can influence how often they make a budget. If your child has ample time, they may be more comfortable preparing a budget more frequently. However, if your child has less time, they may prefer to prepare the budget less often. This translates to longer budget periods, like a monthly basis.
Either way is okay. What is most important is that the budget period reflects your child’s financial patterns and preferences.
Next, let’s look at income.
3. Calculate Income
Budgeting is about managing resources. What is the resource? Your child’s income.
Income is the money your child receives. The money can be earned, by doing chores for example, or gifted. Although, earned income is usually the primary source of income.
Other sources of income may include:
- Proceeds from the sale of goods, like an old bike
- Interest for depositing money at the bank
- Appreciation on investments, like stock
As your child ages, they will want to diversify the sources of their income. This will help reduce risk and realize earning potential.
As it relates to budgeting, your child will need to calculate the income for the selected budget period. For example, if your child decided to use a week as the budget period, they would determine the amount of Total Weekly Income.
To do this they will need to add all their sources of income for the week. Using an income template, like the following, will help perform the calculation. It can also be adapted for any budget period.
Now, that your child knows their Total Weekly Income is $40, they’ll need to calculate their Total Weekly Expenses.
4. Calculate Expenses
Your child’s math skills are well-developed. And they’ll need those math skills for robust budgeting methods. A budget method is how income is allocated, or assigned, to expenses. An expense is what your child plans to spend their money on.
The 50/30/20 budget method is a great method to calculate expenses. It is helpful for beginner budgeters because of its simple three expense category framework of needs, wants, and savings. And it’s quick to do, taking less than 5-minutes.
FYI,A need is a required expense such as housing, clothing, and food. A want is an optional expense such as toys, games, and books. Knowing the difference between needs and wants can help your child spend thoughtfully.
Grab a piece of paper or a computer and let’s make a budget using the 50/30/20 method.
How to Make a Budget Using the 50/30/20 Method
STEP 1: Calculate Income
This step was covered in the prior section, “3. Calculate Income.” In the example, the Total Weekly Income was $40. Review the example and then calculate your child’s numbers to make it your own.
STEP 2: Calculate Expenses Using the 50/30/20 Budget Method
As mentioned, the 50/30/20 budget method has three expense areas:
- Needs
- Wants, and
- Savings
Each of these expense areas is determined by multiplying income by the pre-set percentages. Those percentages are:
- 50% for Needs
- 30% for Wants
- 20% for Savings
For example, that means that the $40 of Total Weekly Income would be allocated as follows:
- $20 for Needs
- $12 for Wants
- $8 for Savings
Here is a graph that shows the calculation visually.
Turn these calculations into a budget by filling in a budget template. Here’s an example.
As your child can see income has been fully allocated to expenses because the “Difference” between income and expenses is zero. Or, more simply put, under the 50/30/20 Method, total income should always equal total expenses.
The final step is to review the budget and make any adjustments based on your SMART goals.
5. Adjust the Budget
Remember back to that SMART Goal about saving money:
I want to save $10 to buy a new game by the end of this month.
In the working example, your child has budgeted $8 for savings.
It looks like your child is just a bit short of the $10 savings goal. Adjust the budget by shifting $2 from Wants to Savings.
TIP: Because needs are required, they’re often fixed costs. That means under the 50/30/20 budget method adjustments occur between the Want and Savings categories.
A before and after budget comparison follows:
Congratulations, your child has finished making a budget.
Conclusion
Knowing how to budget is a great start to managing money. Setting goals, calculating income, and calculating expenses are all important supporting budget skills. Practicing these skills is easy with frameworks like the 50/30/20 budget method.
Use the 50/30/20 budget method to make a budget with your child today.
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