Teaching teenagers how to budget
The most effective way to teach teenagers about managing money is to give them financial responsibility. To do this, they will need an income. This might be through providing an allowance that is given or earned, or encouraging them to get a part-time job.
Then, set clear boundaries about what they need to pay for themselves. For example, you will cover school-related expenses like books, stationery, uniforms, and sports equipment, but if they want to go to the movies with their friends that needs to come out of their own budget.
1. Setting financial goals
Helping your teenager to set a financial goal is a good first step in teaching them how to budget. Do they want to buy a new skateboard, guitar, or gaming console? Show them how they can afford those items by setting a realistic savings target each month.
Setting goals allows teenagers to work towards something in the future and experience the satisfaction of being able to afford a new purchase. This encourages financial discipline and helps them to avoid impulsive spending.
2. Creating a budget
Show your teenager an example of a budget that you use and explain why budgeting is important and how it can help them to afford the things they want and avoid debt in the future.
The first step in creating a budget with your teenager is to identify their income and expenses. How much are they earning or receiving as an allowance and what do they typically spend their money on each month? If you are providing an allowance, ensure it is consistent every month to make budgeting easier.
Teach your teenager about wants vs needs. Do they really need that new phone cover or clothing item? Could they rather put that money towards a bigger goal like the guitar they’ve been wanting for ages? Working through questions like these can help them to understand why it is beneficial to take a long-term approach to their finances, rather than seeking instant gratification.
One way to help your teenager create a monthly budget is my employing the 50/30/20 rule and dividing their income into three categories:
- 50% on needs
- 30% on wants
- 20% on savings
This approach helps them to assign every Rand a job. As soon as money comes into your teenager’s bank account, they need to decide what that money is going to do.
Help them to create a budget with various categories and then to allocate their income to each category so they know where it’s going. For example, if they earn R500 for mowing lawns in your neighbourhood, R250 gets allocated to data and airtime (a need), R150 goes towards entertainment (a want), and R100 goes into savings. This prevents them immediately spending the R500 on a pair of shoes they saw online.
3. Teaching them about credit and loans
Once they have a monthly budget that is working for them, it might be time to have a conversation with your teenager about the advantages and risks of credit and loans. One easy way to do this is to explain the different types of credit you use and the interest rates on each, and why it is important to select loan repayment plans with the lowest interest rates possible.
This knowledge will be helpful if they need to take out a student loan for their tertiary education in the future.
4. Enabling good financial habits
Setting a good example is key when teaching your teenager how to budget. Young people can be highly perceptive and will notice if you don’t practise what you preach.
Lead by example and consult UCT Online High School’s guide on the real cost of high school to help you prepare financially for your teenager’s high school career.