How to Raise Budget-Savvy Kids

Even 10-year-olds can manage the family entertainment budget.

Kids don't spend much time worrying about paychecks, bank accounts, or bills. They figure that's a job for parents.

But if you leave them in that fantasy world and never discuss budgets, your kids might grow up thinking the money they need appears by magic. Then they'll be candidates for financial disaster.

Fortunately, you can teach them what they need to know about managing finances with just a few basic steps. Help them understand where the money comes from, how to keep track of where it goes and how savings can work wonders. You'll build habits that will pay dividends for the rest of their lives.

For children, managing a budget requires three types of information:

• Income -- how much they typically earn from allowance, chores, and gifts in a typical week, month, and year
• Spending habits -- what they've been doing with the money
• Goals -- how much they think they should devote to saving, spending, and giving away

Armed with this information, your next steps to teaching your children how to budget are straightforward:

Tally income first: Whether kids receive money in dribs and drabs or from a regular allowance, they -- and their parents -- often are surprised at how much money actually comes in over the course of a year. If your 12-year-old gets a \$10 weekly allowance and usually receives \$20 for her birthday from her Uncle Irwin, ask her to calculate how much that comes to in a year (\$10 x 52 = \$520; \$520 + \$20 = \$540). That should help her realize that there's a lot of money at her disposal, if she can just be patient, save regularly, and plan ahead.

Take a look at where the money goes: It's easy for kids to let that money slip through their fingers without getting much in return. If your child has been spending her own money for a while, help her track her spending each week for four weeks. Divide the total by four to get the weekly average.

Set goals: Now your child has the information she needs to make a budget. In the example above, a \$540 annual income equals \$45 per month. If she really wants a new bicycle that costs \$150, how much of her \$45 does she need to save to buy the bicycle in six months or a year? For instance, it takes six months if you save \$25 a month for the new bike or four months if you save \$37.50 a month.

Tinker with the numbers: Kids who have had spending money for a while may need to learn to manage their spending to buy the bigger things they dream about, such as bicycles and guitars. If your daughter who wants the bike generally buys two \$15 compact discs each month, she may decide to live with just one instead. Plus, she might cut out one movie per month, saving \$15 when you figure the price of a ticket plus concession-stand snacks.

By making those sacrifices, she's saving \$30 a month. To speed her saving even more, she may decide to baby-sit or do extra chores such as mowing the lawn or washing the car.

You can reinforce the budget habit by putting the kids in charge of some family expenses. As early as age 5, your child can help clip coupons, compare unit prices, and watch for sales on things you usually buy. Let him either keep the savings or put the cash in a special jar for use on family outings, computer equipment, or movie tickets.

Kids age 10 and up can manage all or part of the family entertainment budget. You decide how much the family should spend each month on movies, concerts, sports events, and restaurants.

Then, every time the family eats out, orders a pizza, or rents or attends a movie, the kids should enter the expense on a simple ledger or computer spreadsheet. If the circus, their favorite band, or favorite team are in to town, let the kids figure out how to cut back on other family entertainment to pay for tickets.

Your kids should keep a running balance from month to month. It should never exceed the monthly budgeted allotment. If they have a surplus at the end of the year, let them vote on how to spend it.

In the end, your kids will become smarter savers and more savvy consumers.