Setting Up a Budget for Your Child
The purpose of having a budget is to set up guidelines for your child to follow in spending (and saving) his money. The budget isn't binding or fixed in stone; no alarms will go off and no police will arrest him if he overspends from the allotted amount from one category and underspends from another. But, the better he sticks to the plan, the better able he'll be to pay for the things he wants and needs.
Now that your child knows the information he needs to make a budget, he can begin the process. Assemble paper and pencil (and a calculator) and begin.
Watch Your Step
Don't set up a budget for your child; let her work through this task herself. The budget process is an invaluable experience. If you tell her what she's got to spend on this or that, she'll never learn how to make smart money decisions on her own.
Watch Your Step
The total dollars your child has budgeted for a certain amount of time must equal the dollars he has available during that time. For example, if his allowance is $15 a week, his budget for a one-week period should total $15—not a penny more or less.
Budget Period and Categories
The federal government sets an annual budget that begins on October 1 of every year. Grown-ups typically use a monthly budget because many expenses—rent or the mortgage, the phone and electric company bills—come once a month.
Your child's budget can span any length of time.
- Younger children may be able to focus only on smaller units of time. They may be better off using a weekly time frame that runs from the start of the school week through the weekend.
- Teenagers can probably handle whatever time frame they want to select. They may want to use a monthly budget like you, or a budget that runs from allowance to allowance or from paycheck to paycheck (for example, you're paid twice a month, or weekly). So, they can have a budget that runs 15 days or 7 days. Whatever helps them to manage their money best will work. For the purposes of this article, we'll call this their budget period.
Review the list of items your child has to pay for. Now jot down what she thinks it's going to cost her to pay for them during each budget period. If she pays for an item once a year, such as a magazine subscription, but her budget period is monthly, be sure to divide the cost of the item by 12 and enter only 1/12 of the cost in her monthly budget. If the budget period is weekly, divide by 52.
Piggybank on It
The amount of the fixed expense may not be identical each month, but the budgeted amount is. For example, a telephone bill may run $20 one month and $30 the next, but the monthly budgeted amount of $25 remains constant from month to month.
Things that are more or less stable in amount from month to month—for example, donations for charity—are called fixed expenses. Items whose cost changes from month to month, such as entertainment costs, are called variable expenses.
Each item she must pay for or set aside is called an expense. Every budget has two types of expenses: fixed expenses and variable expenses. Fixed expenses occur each week, and the amount of these expenses generally remains constant from week to week. Fixed expenses that your child might have include these:
- Savings allocation
- Donations to charity
- Telephone bill (arising on a monthly basis)
- Transportation costs (bus fare, gas for the family car)
Variable expenses are the opposite of fixed expenses. These are also referred to as flexible expenses because they aren't rigid. In some weeks, variable expenses may not even be there. Examples of variable expenses your child might have include these:
- Entertainment costs
- Gifts for relatives
In making a budget, fixed expenses are listed exactly as they'll be paid or are expected to be paid. For variable expenses, make an estimate of what they might be. Even though they may not be the same each month, it's a good idea to provide a certain amount for them on a regular basis. Then, if they don't arise in a certain month, that money can be set aside. These set-asides will accumulate and be used later when the variable expense comes along.
Setting Up a Personal Spending Plan
Now that your child knows all the components in his budget, it's time to put things down in writing. Use the following chart to fill in his personal budget. Some common budget items are already listed.
|Your Child's Personal Budget for His Budget Period|
|Donations to charity||$_______________|
|Toys and games||$_______________|
Your child can test out his budget at an interactive Web site that lets him enter his income and expenses and then displays the amount he's short (or over) each month. He can then adjust the income or expense sides to balance his budget.
Piggybank on It
The savings portion should be treated as a payment to your child (list it like any other expense). Don't let your child get into the bad habit that so many adults have of putting into savings only what's left over at the end of the budget period—in this case, there's typically nothing left over.
Remaking a Budget
A budget isn't carved in marble. It's something that can be adjusted when needed. In fact, the budget should be completely made over at certain times.
- When income increases. If your child gets a bigger allowance or starts to work part-time, she'll have more money to plan for.
- When expenses increase. As spending responsibilities are shifted to your child, she'll have to budget for them accordingly. For example, if she's the one to pay for after-school activities, then she'll have to manage her money by putting these items into her budget. Spending responsibilities typically increase with your child's age, but they can also increase if your child's wants start to exceed your ability to provide. For example, if your child wants a car and you're not going to buy her one, she'll have to adjust her budget to expand her savings so that she can buy the car on her own.
More on: Money and Kids
Excerpted from The Complete Idiot's Guide to Money-Smart Kids © 1999 by Barbara Weltman. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.
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