Money Talk Series: Part 2

Previously, we explored the psychological underpinnings of guiding children in differentiating their financial needs from desires.

This time, we're delving deeper, focusing on practical strategies to educate your children about budgeting.

🙃 The topic of budgeting might seem daunting or tedious, but bear with me as we navigate through it…

Growing up, I found math unappealing, primarily due to its seemingly irrelevant nature:

Consider this scenario: In a galaxy far away, two cosmic snails, Speedy and Flash, engage in a race. Speedy's velocity is the square root of Flash's. If Flash zooms at 49 light-years annually, and the galaxy spans 196 light-years, how long will it take for Speedy to traverse it?

Such problems felt trivial.

My interest in math sparked only when I ventured into the business world, where I discovered the fascinating aspects of numbers. Numbers can empower you, narrate your life's journey, foresee the future, and the beauty is, you don't need to be a math prodigy to extract valuable insights from them – just knowing where to look suffices.

Budgets serve as a tool for this exploration.

There are four key elements in budgeting:

1. Establishing a goal

2. Developing a plan (a budget) to reach that goal

3. Sticking to the plan

4. Reviewing your progress

I aim to guide you in teaching your child these four aspects.

Step 1: Establish a Goal

Creating a budget without an objective is akin to embarking on a journey without a destination. You may make progress, but not necessarily in the right direction.

To acquaint your kids with effective financial goal-setting, take inspiration from James Clear’s "Atomic Habits" and apply these principles to their initial financial objective:

- Make it clear

- Make it appealing

- Make it simple

- Make it gratifying

🔍 Make it clear by starting with a straightforward goal. Use the bedroom exercise from the previous article to find a goal linked to their daily activities.

🕹️ Make it appealing by initially allowing for a less "practical" choice. If it’s a new video game, so be it. The aim is to spark their interest in the process.

🎯 Make it simple by setting an attainable goal. Avoid setting them up for failure on their first attempt.

🎉 Make it gratifying by setting a short timeframe for achieving the goal, like a few weeks. This allows them to quickly experience the satisfaction of reaching their goal, fostering excitement for long-term financial planning.

Step 2: Formulate a Plan

This should begin simply, with three basic steps:

1. Monitor income and expenses: Start with their allowance or gift money as their income. Help them list and track their expenses, which could include snacks, toys, or movie outings.

2. Sort expenses: Revisit the needs vs. wants discussion. Now is the time to categorize their expenses accordingly, helping them understand their spending patterns.

3. Allocate funds: Decide how much money will be used for ongoing expenses versus their set goal. They might need to forgo certain things to achieve their target.

Step 3: Stick to the Plan

Your child may need encouragement to remain focused.

Useful tools for children of all ages include:

📈 Visual goal charts: For younger kids, a progress chart or a thermometer-style drawing that fills up as they save is effective. Older kids might benefit from more detailed graphs tracking savings over time, making progress both tangible and exciting.

📱 Budgeting apps: Consider apps like Gimi for budgeting assistance and financial education, or Go Henry, which links with a special debit card for kids.

🏅 Milestone rewards: Introduce small rewards for hitting milestones. For example, if the goal is saving $100, offer a treat at the $50 mark, like a favorite meal. This maintains motivation and teaches the importance of celebrating small victories.

Step 4: Review Performance

Often overlooked, this step is crucial.

Reflecting on the past is vital for future planning. While predicting external factors is challenging, the best indicator of future behavior is past behavior.

Regardless of whether the goal was met (and ideally it was, following steps 1-3), ask your child:

- How do you feel about the outcome?

- What are your thoughts on the sacrifices made (or not made) to achieve this?

- Could you have reached your goal sooner? If so, how?

- Looking back, what would you do differently?

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

These questions facilitate a constructive conversation about their experience, shaping future goal setting, budgeting, and adherence strategies.

Remember, personal finance is exactly that – personal.

Let your child's experiences steer their financial journey.