What Kids Need to Know About Budgeting

When managing money, a child who knows how to budget has an edge.

Higher savings.

Lower debt.

Greater net worth.

Knowing the four budget process steps unlocks these advantages in your child’s life.

Let’s kick off by defining a budget.

What is a Budget?

A budget is a plan.

This plan helps your child decide how to save and spend money.

Dave Ramsey

Directing their money through budgeting will help them manage money wisely and build wealth. That is why budgeting is important.

Now that your child knows what a budget is, let’s explore the process that will help your child learn how to make a monthly budget.

What is a Budget Process?

Budgeting is a multi-step process. This is important because making the budget is often cited as the only step in the budget process when it’s just the first one.  

This broad understanding will help your child effectively budget. 

Onward to discover the 4 budget steps.

What are the four steps of the budget process?

To create an effective budget, your child will:

1. Plan
2. Track
3. Review, and
4. Adjust

These steps make up the personal finance budget process. Let’s begin with step one, planning.  

STEP 1: Plan – Make a Budget

Away with complex spreadsheets and calculators. Your child doesn’t need it to budget.

In essence, making a budget boils down to one thing.

Making a list.

A simple, humble list of expenses or what your child spends their money on.

That’s doable.

Expenses have 3 elements:

• the expense item or area (gas, cell phone bill, or clothing),
• the related cost (amount of money), and
• the period (usually a month).

Listing these elements and total income makes a budget. Income is the amount of money your child expects to receive during a month.

 Create a budget by helping your child

1. Set savings and spending goals,
2. Total their monthly income,
3. Select a budget method, and
4. Review the monthly expenses for adjustments.

Since selecting a budget method will take the most time, let’s focus there.

Select a Budget Method to List Expenses

A budget method is how your child approaches creating an expense list.

There are two schools of thought when selecting a budget method.

When percentages are used, an allocation-based budget method is applied. An example of this is the popular 50/30/20 Method.

This top-down approach allocates, or assigns, income using pre-set percentages into three expenses. Needs. Wants. And savings. This approach is best for pre-teens for its simplicity, quick application, and practicality.

When expense line items are used, this is a non-allocation-based budget method. The Zero-Based Method is a great example.

This bottoms-up method uses brainstorming to generate a list of expenses and costs. Inspiration can come from awareness of past and upcoming financial activity. This can include bank statements, credit card statements, and receipts.

Next, subtract Total Expenses, the sum of the line items, from Total Income for the month. Adjust the expenses until the difference is zero.

This detailed approach gives great visibility to financial activity and helps curb spending. As a more advanced budgeting technique, it’s best suited to high schoolers.    

As you can see, depending on your child’s age, one budget method may be more fitting. Select the link below for age-appropriate budget insights.

>>> More: Early Elementary: Ages 5 – 8

>>> More: Late Elementary / Middle School: Ages 9 – 13

>>> More: High School: Ages 14 – 17

Lastly, your child will want to review their budget and make any final adjustments.

Congratulations, your child has made a working, written budget. With the planning step complete, let’s keep it movin’.  

STEP 2: Track – Record Actual Income and Expenses

Lists are meant to inspire action.

In budgeting, that action is living within your means or managing your expenses to meet spending and saving goals. 

Your child accomplishes this by tracking their money. Specifically, the monthly income received and expenses incurred. Using a system will help them organize this information.

There are many different systems to choose from. Some free or low-cost systems include pen and paper (such as a spiral notebook or ledger paper), Excel, Google Sheets, or Numbers.

After your child gets the hang of tracking, they can graduate to a premium system such as You Need a Budget. But, they don’t have too.

Here is an example of a two-column tracking system summary your child can use with a paper-based or electronic system.   

NOTE: If your child is using the 50/30/20 budget method, the expense line items listed above would be replaced by the following line items: Needs, Wants, and Saving. The above example is based on a zero-based budget method, which is more detail. As such, it has been used for example purposes.

Your child will benefit from this step by becoming more aware of their financial actions.

Next up is step 3, financial review and analysis.

STEP 3: Review – Compare Actual and Budgeted Amounts

Now comes the question every budget eventually faces:

How much budget is left?

Your child can answer this timeless question by comparing their actual costs from Step 2 with the budget amounts in Step 1.

In finance, this is called variance analysis. Because your child is looking to understand how much the actuals varied, or were different, from the expected budget.

Here’s how it’s done.

From the analysis above, your child can see many things.

They can see that there is $20 left of the total budget.

They can see the connection between deciding to bring lunch and saving money.

They can see other personal financial strengths and weaknesses related to their spending habits.

Critical to all these observations is the importance of budget accuracy.  

Speaking of accuracy, that leads us to the final step.

STEP 4: Adjust – Update the Budget

A budget is dynamic. Because it’s based on your child’s best-guess estimate. As more information becomes available, the budget is updated.

For example …

Maybe costs were less than your child expected, like the Car Insurance in Step 3.

Maybe costs were higher than expected, like the Gas in the same example.

Maybe your child set a new financial savings goal, like eating out less.

Changes like these, which could affect the next period, need to be included in the new budget.  

Here is an example of how to adjust the budget for next month.

NOTE: Because the student expects to do more driving next month, the gas cost has been raised by $5 to $40 in the example above. Also, emergency fund has increased by $15, absorbing the variance of $20 from bring lunches in Example 2 offset by $5 in higher gas cost.

Conclusion

To make a budget, your kid needs to know four things: how to plan, track, review, and adjust their budget. Together, these steps make up the budget process for personal finance.

Hone your child’s budgeting skills. Make a budget together today.