Budgeting for a Teenager and How to Use the 50/20/30 Rule

Budgeting for teens
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A friend of mine asked me how to teach his teenage son how to budget. How would I create a budget for someone who doesn’t have a steady income but have him understand that he still has obligations to pay?

Before I tackle the question, I want to briefly mention the importance of a budget. A budget is a guide and plan for tracking your money. You have discretion as to how to allocate your money, but try to keep it simple. The more categories you create, the more difficult your budget may be. And if your budget is complicated, then it may become a chore to keep track of. Chores are not fun. Don’t do that to yourself.

As a finance nerd, I love budgeting and do it as a hobby, but I understand that it’s a disagreeable or stressful chore for many people. However, do your best to make your budget fun. Make it rewarding and enjoyable.

The 50/20/30 Rule of Budgeting 

A while ago I read an article on budgeting using the 50/20/30 rule. It simply states that 50% of your earned income should go into your “Essential” expenses. The essential expenses are your “needs” for daily life –  groceries, shelter, transportation, and utilities.  20% of your income goes to your Financial expenses. These expenses are your credit card debts, student loans, savings and retirement contributions. The last 30% of your earned income covers your “lifestyle” expenses. This is where “fun” in your budget comes in. The expenses in this category are your wants, charitable giving, vacation fund, and other personal discretionary expenses. The types of expenses in this category are eating out, cable, shopping, hobbies, vacation fund, gym memberships, etc.

I implement the 50/20/30 rule for myself and my family. As simple as it sounds, it’s not easy. In actuality, the percentages change from month to month. One month my essential expenses may be over 60%, and/or my lifestyle expenses comprise 40%. That is normal. Honestly, it is rare for my budget to be at exactly 50/20/30 because more often than not, there are unexpected expenses that arise. Car repairs and unexpected medical expenses are common. In the past year, our water heater and refrigerator both needed to be replaced. These things happen, but don’t get discouraged. Stay focused. It’s easy to revert back and just forget about the budget, but do make the effort to aim for the 50/20/30 budget.

Budgeting for a Teenager

To answer my friend’s question, I would implement the 50/20/30 rule. Since his son is still in high school and has a part-time job, but just got his first car, I would have him pay for the car insurance, car payment, and gas. If he makes less than the full amount of those three items, then I would have his son give up at least 50% of his monthly earned income to cover those expenses. 20% of his earned income should go to savings and 30% would be left for whatever he wanted to spend it on. That budget creates the habit of SAVING 20% of his income. A teenager who can understand how to budget will be better equipped to make financial decisions in the future.

To Recap here are the three major points below:

  1. 50/20/30 rule of budgeting. 50% of earned income goes to essential expenses (shelter, groceries, utilities & transportation). 20% goes to financial expenses and retirement (debt, savings, retirement). 30% goes into your lifestyle expenses (shopping, eating out, charitable giving, vacation fund, personal spending). Click here for a free template.
  2. Make your budget fun! In your financial and lifestyle expense category, put away some money that is just for YOU – the current you and the future you (retirement).
  3. Stay focused and maintain your budget. Getting sidetracked happens because LIFE happens. But if you stay focused and know exactly where your money goes, you will be on your way to personal financial happiness.

There are a lot of people out there who have never created a budget before. Today is still the best time to create one. If you did create one and found that your essential expenses were 90% of your earned income, that’s fine too. You’ve made the first step and identified that 90% of your earned income goes to your essential expenses. Once you’ve accepted your budget and realized where your money goes, only then can you identify what to cut. A budget is not a panacea for financial problems. Unfortunately, sometimes you simply need a higher salary or need additional income on the side to cover your expenses. However, a budget can still help you use your current salary more efficiently as you search for a higher-paying job.

The budgeting process is a journey. Take the time to create a budget that works for you, know where your money goes and reward yourself. If you can make budgeting fun and enjoyable, it won’t feel like work.

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