Money Talk: Part 2 — Budgeting

_{This is part two of a three-part series on financial literacy. You can find part one here. Look out for part three on 1/30/2024.}

Last week we discussed the psychological fundamentals behind helping your kids establish their financial needs and wants.

This week, we will build on that concept and introduce some tactical advice on how to teach your kids how to budget.

😣 Nothing can make someone’s eyes bleed more than the mere mention of budgeting, but please stay with me here…

I really hated math growing up, mainly because the way it was taught was so impractical:

Who gives a crap?

It wasn’t until I got interested in business that I learned how amazing numbers can be. Numbers can:

• Give you power

• Tell the story of your life

• Predict the future

And the best part is you don’t have to be a math whiz to extract incredible information from numbers — you just have to know where to look.

Budgets help us achieve this.

There are four crucial components of budgeting:

1. Setting a goal

2. Making a plan (a budget) to achieve that goal

3. Adhering to that plan

4. Evaluating your performance

 I’m going to help you teach your kid all four components.

Step 1: Set a Goal

Crafting a budget without a goal is like setting out on a road trip without a destination. You might cover some ground, but you won’t end up where you want to be.

To introduce your kids to practical financial goal-setting, I suggest taking a page out of James Clear’s Atomic Habits playbook, and apply the following criteria to their first financial goal:

1. Make it obvious

2. Make it attractive

3. Make it easy

4. Make it satisfying

👀 Make it obvious by not digging too deep at the start. Use the bedroom exercise from last week’s article to discover a goal that links back to their daily routine.

🎮 Make it attractive by not pushing too hard for a “smart” choice at the beginning. If it’s a new video game, so be it. The key is to get them excited about this process.

🎯 Make it easy by ensuring that it’s an achievable goal. Nothing will turn them off to budgeting more than failing on the first try.

🎉 Make it satisfying by setting a short time period in which to achieve the goal, such as a few weeks rather than a few months. You want them to experience the thrill of crushing their goal to get them excited about long-term financial planning.

Step 2: Make a Plan

This should be very simple to start, and there are three general steps:

1. Track income and expenses: Even if your child's income is just an allowance or birthday money, it's essential to start here. Help them list their sources of income and track their expenses. This might include snacks, toys, or trips to the movies.

2. Categorize expenses: Remember our discussion about needs vs. wants? Now's the time to categorize expenses under these labels. It’s an excellent way for kids to see where their money is going.

3. Allocate funds: Decide how much money will go towards their current expenses, and how much can go to the goal they’ve set. Chances are, they’re going to have to give something up to reach that goal.

Step 3: Adhere to the Plan

Your kid is probably going to need a nudge or two to stay on track.

There are some great tools for this for kids of all ages:

📈 Visual goal charts: Create a visual representation of goals. For younger kids, this could be a progress chart or a thermometer drawing that fills up as they save. For older kids, consider a more detailed chart or graph that tracks savings over time. The visual element makes the progress tangible and exciting.

📱 Budgeting apps: There are some incredible apps like Gimi which provides budgeting support as well as financial education for kids, and Go Henry which even connects with a special kid’s debit card.

✅ Milestone rewards: Introduce small rewards for reaching certain milestones. For instance, if the goal is to save $100, give a small reward at $50, like dinner at their favorite restaurant. This keeps motivation high and teaches the value of celebrating small successes.

Step 4: Evaluate Your Performance

This is the step everyone skips.

Don’t be that guy.

The only way to prepare for the future is to look backwards. While it’s impossible to predict outside forces, the best predictor of your kid’s future behavior is their previous behavior.

Whether or not the goal has been achieved (and if steps 1-3 have been followed, I sure hope it has!), ask your kid these questions at the end:

1. How do you feel about the result?

2. How do you feel about what you gave up (or didn’t give up) to get there?

3. Do you think you could have reached your goal quicker? How?

4. If you could go back in time, what would you have done differently?

5. On a scale of 1-10, how proud of yourself are you?

Use these questions to ignite a productive discussion about their experience, and inform future goal setting, budgeting, and adherence tactics.

Personal finance is just that — personal.

Give your kid ownership by allowing their personal experiences to guide the process forward.