Money Skills Part 1 - Budgets

Money skills are an important personal skill for all young people to learn. With economic times not looking so rosey anymore, money is something we are all becoming more aware of, but the average teen has never seen a recession - they are simply not old enough. So how do we teach them the skills they need to manage their money well when times are tough? This article series looks at teaching some core money skills, and some of the issues which surround them:

1. budgets
2. savings
3. credit
4. goal setting
5. planning for the future
6. foreclosures
7. bankruptcy
8. ethical investment

For students, the ability to budget is critical. If students are able to write a regular budget, and update it as their circumstances change, they are much more likely to effectively plan their income and expenditure, and to avoid the credit traps of high interest loans, store cards and multiple debts.

A budget is really quite simple:

On one side is income. This means income from all sources, such as jobs, bank account interest, allowances, gifts, and occasional money from other sources. Show students how to work out their weekly, fortnightly or monthly income using simple calculations (x weekly income by 52 for yearly income; x fortnightly income by 2 for monthly income etc). Ensure students are able to recall whether they are working in weekly, monthly or yearly budgets.

On the other side is expenditure (expenses). This is more difficult to work out, but for most teens the categories go something like this:

• entertainment
• clothing
• electronic equipment / games / mobile (cell) phone costs
• recreation
• transport
• hobbies
• food
• memberships
• board / rent

Obviously not all students will need all these categories. Discuss as a group which headings are most relevant, then have students complete their own budget using approximate values for each. Help students divide their lists into essentials and non essentials, and to experiment with adjusting the figures (for example, decreasing the amount spent on clothing or recreation) to see what the effect is over the course of a year.

Ask students to nominate high points in the year where their budgets may be affected by change eg. Christmas, birthdays, holiday seasons.

Encourage students to work their budget calculations in pencil, as this reinforces the idea that budgets can and should change over time. A budget which is seen as unchangeable means it does not allow for changes to income or expenses, which can have implications over an extended period.

Students may also enjoy working in a program such as Excel, where they can input data and practice using the Autosum function to add their columns, or to create a formula to subtract their total expenses from their total income.

The key 'take home' messages for budgeting are that:

1. budgets can change over time
2. a change made in a weekly heading will be multiplied greatly over the course of a year
3. The aim is for income to always be greater than expenses

Barry has written a budget. Barry doesn't know how to organize his budget very well. Some of his figures are for weekly income and expenses, while others are for different time frames. His budget looks like this:

Income:

holiday job 6 weeks @ $150 per week

regular job 40 weeks @ $80 per week

weekly payment from Mum $20

Expenses:

clothes $20 per month

haircuts $15 x 4 per year

new computer games 4 per year @ $45 each

going out with friends $10 per week

food at school and snacks etc $15 per week

cell phone $20 per month

bus travel $50 per month

Help Barry organize his budget so all his figures are for the same time frame. Then work out his savings or debt per month, and for a year. Experiment with adjusting the figures to give him a greater amount of savings by either increasing his income or decreasing his expenses. What feedback would you give Barry about his budgeting skills?

Group students into pairs. Ask each pair to come up with a list of what they would call 'non essentials'. Combine each pair with another pair and compare lists. It is likely there will be some differing views about what counts as an essential and a non essential. In their groups of four, ask students to think about a scenario where:

'A family's bank is considering foreclosing on their mortgage. They are in serious danger of losing their home if they do not make some changes now. They know if they sell they will not get as much for their house as the value of their mortgage. The best option is to decrease their expenses over the next two months by cutting back on non essentials. Help the family work out a plan to save their home. List the non essentials they can remove from their budget. Re-work their budget so they can keep their home'.

Income is the other side of a budget sheet. Income is the money coming into the family. It comes from:

• salary / wages
• overtime
• shares and investments
• interest on bank account savings
• rental income from rental properties
• gambling - horses, poker machines, casinos, lotteries etc.

Students need to be aware that there are some higher risk and lower risk ways of boosting income. The level of risk depends at least partly on knowledge and skills, and partly on luck.Working more hours is an example of a lower risk way of boosting income. Gambling is a high risk example, which generally does not rely on skill, only on luck.

Reinforce the key themes for this lesson, then encourage students to revisit the material before their next class on savings. For information on teaching savings, see the article in this series 'Money Skills Part 2 - Savings'.