You’re never too young to start budgeting. Now, your teens may not agree, but the reality is, learning key financial skills while they’re young builds strong, positive habits that will provide immeasurable benefits later on in life.
We want to partner with you to empower your teens to make a profound impact on the way they view and use money, because financial discipline sets your kids up for success. Though they may not have a mortgage or car payment just yet, the practice of budgeting for teens gives them the tools of discipline and perspective, empowering them to thrive no matter where they go. That’s why we’ve compiled a list of our top budgeting tips for teens from financial gurus like Dave Ramsey and Ramit Sethi!
Tip #1: Discover your teen’s financial habits
First things first — before trying to change your teen’s financial habits or build new ones, you need to know what habits they already have.
Sit down with your teen and take time to go over what they spend within a given period of time. We recommend reviewing your personal spending habits alongside your teen’s so they can gain perspective on what their expenses may look like when they’re older! Start by reviewing your spending from the last full month, then compare that spending to a few prior months to get a sense of which items are purchased out of habit, and which are occasional purchases.
These patterns show you and your teen your current purchasing habits. This is a great opportunity for conversation — don’t be afraid to enter into an honest discussion on where you could personally improve your current purchasing habits! This builds trust and confidence in helping them handle their finances.
Tip #2: Sort your teen’s spending
Taking the purchasing habits you’ve discovered, have your teen sort their recent purchases into one of these four categories:
- Fixed costs
- Guilt-free spending
Write down each expense and then label it with one of these four categories. Now, we do recognize that if your teen still lives at home, most of their spending will fall into category 4. But the goal of this exercise is to get your teen to start critically thinking about the purpose behind their spending.
Rami Sethi refers to his budgeting technique of sorting your spending as a “conscious spending plan,” and we love his approach! Why? Because it’s much more powerful to build a healthy mindset that leads to positive behavior than it is to try and adjust your habits with an excel sheet. That’s why it’s our No. 1 tip when it comes to budgeting for teens!
Tip #3: Review a healthy adult budget
In this next step in budgeting for teens, we want to prepare your teen for what a healthy, balanced adult budget looks like. Review the following recommended breakdown for what each category should comprise of your total income:
- Fixed costs: 50-60%
- Investments: 10%
- Savings: 5-10%
- Guilt-free spending: 100% minus the total % of categories 1-3.
Adjusting the budget for at-home teens:
For categories 1-3 of this conscious spending plan, at-home teens don’t necessarily have the need to meet those recommended percentages. Here’s what we suggest to adapt this method of budgeting for teens so that they can internalize a changed view of these purchases:
- Fixed costs: Try having your teen pitch in for things like gas when they use the car, groceries if they want something that’s not on the family list, or even a portion of their phone bill.
- Investments: Have your teen use easy, simple, and low-risk investment apps like Acorns or Betterment, and affirm how each dollar they invest is actively growing for them in the long-term.
- Savings: Set a savings goal with your teen so that they avoid (or break) the habit of spending every dollar they make. We highly recommend setting a percentage goal rather than a lump-sum goal. For example, have your teen set goals like “I’m going to save 3% of every dollar I make this month,” instead of, “I’m going to save $100.” Percentages develop a perpetual saving mindset, whereas lump-sum goals encourage you to quit saving after your goal is reached.
Tip #4: Make sure the budget ends with “$0.”
Before you get worried, we don’t want your teen to plan on having $0 in their bank account. Instead, we actually suggest you set a “minimum threshold” of at least $100 that they begin to view as “$0. ”In other words, the bank account should never drop below $100.
By saying “make sure the budget ends with “$0,” we mean that every dollar of income your teen receives each month should be accounted for in one of the four conscious spending categories we mentioned above.
If your teen is focused on just paying their expenses and spending the rest of their money, the critical skills of saving and investing are easily pushed aside. By making sure every dollar is spent on one of the four categories we laid out, your teen can manage their savings and investing goals with ease.
Our team at BHGRE Steinborn & Associates is honored to guide you and your teen through the process of building strong financial habits that last. If this blog sparked any questions, please don’t wait to contact us online today or give us a call at 1-800-234-3698.