Budgeting Exercises to Help your Kids Develop Smart Money Skills
For many parents, answering questions form your kids about money—how much you make, how much your company is worth, or how much money they have—can be an anxiety-riddled minefield.
Maybe you’re thinking if your children know about the family’s wealth, they’ll lose their motivation, become entitled, or worse. (See: Affluenza.)
Gretchen Rubin, author of The Happiness Project, puts it bluntly: “We all want to raise our children with good values—children who are the opposite of spoiled—yet, we often neglect to talk to our children about money.”
One of the first steps to fostering a strong set of values and a healthy relationship with money is in teaching your children about money choices, i.e. budgeting.
Why instilling budgeting exercises early works
Raising children who are generous, who save, and who are grounded in their spending, is a major undertaking. While there are many, and more comprehensive, approaches to budget with your children, the overarching goals are the same:
- Help your kids better understand how money works and to be more thoughtful about money
- Give your kids autonomy and control with their money to understand the impact of their planning & choices
- Facilitate continuing, healthy dialogues with your kids about money
Jon Jones, co-founder and CEO of Brighton Jones, recently shared how he teaches his four children about money.
“We start them at 12-years-old,” Jon says. “I wanted to make sure they were emotionally mature enough to manage it. I also don’t tie it to helping out around the house—dishes, yard work, cleaning their bedroom or bathroom. That is their job as a member on Team Jones.”
How can kids make budgeting decisions
Before the conversation with your child, Jon says you should have “a general idea” of the money you want to allocate to your children, and what your children are expected to use that money toward.
It starts with establishing a reasonable framework based on your children’s needs and your family’s income level. For example, maybe you pay for your children’s basic needs and have them budget and pay for anything beyond that. You can help your children categorize their “beyond” expenses. Maybe it’s something like clothing, gifts for friends and relatives, or entertainment such as concerts or dining out with friends. The goal is to get them to make the decision and choices on how to use their money.
For example, they can decide to spend it on a triple venti caramel macchiato or nothing, new Nike Air Force 1 sneakers or last year’s Nike model at Nordstrom Rack. Jon says this approach give them more autonomy, independence, and practice in making decisions.
When it comes to teaching the budgeting basics, parents can help their children establish a monthly budget based on what they spend their money on today, and what items they frequently request money for. Once you have a list, help your children assign a monthly dollar amount to each item. You can come about this number by using historical spend (preferred), or some items can be estimated as a monthly figure. Otherwise, you will want to adjust the amount to a monthly figure (i.e., if it’s an annual charge, divide by 12 to get to a monthly budgeted number).
Once you establish a budget, decide how frequently you deposit money in your child’s account. Jon said he and his wife established a monthly budget with their children and make a deposit twice a month. If a child earns extra money beyond their allowance, this is just considered extra money they can now spend.
What gets measured gets managed
To help your children learn from this exercise, it’s important to have them track their spend vs. the established budget.
Consider how much involvement you want to have in your children’s spending. Maybe you want to set boundaries, or perhaps you want to avoid over-managing their choices. Some parents, for example, choose to give their children the discretion to pick what they want to spend their money on so long as they’re within budget. That means if one of child wants to buy a pair of pants at a high-end store and another wants to use the same amount of money to buy 10 pairs of pants at the thrift store, the choice is theirs.
The next aspect to consider is if your children need to request more money, have a system in place for what that looks like. You may choose to have them provide you context as to why. After all, if they tracked their expenses, they should be able to tell you where they overspent, why they went over, and the reasoning behind the additional request. Once you have this conversation, you can choose to provide them more money, and then determine whether you need to adjust their monthly budget going forward.
The Warren Buffet approach to money talks
Back in 2011, Peter Buffett, the youngest Buffet son, said in a Freakonomics radio podcast that, he was 25 before he realized his father was a multi-billionaire.
“Because we didn’t grow up wealthy or seemingly, we never thought about an inheritance,” the youngest Buffett said in the podcast. “We never assumed we would be getting anything at any time. And we weren’t bitter or thinking that we should for some reason. We just grew up in a house where you work hard and you make your way in life. And hopefully you have a well-lived life based on all sorts of criteria.”
In a quote widely repeated when it comes to raising children with wealth, Warren Buffett said that he wanted to give his kids “enough so that they could feel that they could do anything, but not so much that they could do nothing.”
I couldn’t agree more.