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Can you explain to your child how to budget his money? Not everyone can, as I learned when one of my clients called me last week and asked if I could speak with their son, John, who is in college. He has received a paying internship for the summer and had some questions about how to handle his money. I have known John for a number of years but the previous topics of conversation were usually about his electronic gaming skills or how pathetic the Mets are. This time, the conversation would revolve around a topic that I actually know something about.
John is fortunate in that his college education is being paid for in full by his parents and that money has never been a real issue for him. The parents are not wealthy but have adopted a strategy of living within their means and have been able to enjoy what they deem the important things in life. They have learned to prioritize and, while speaking with John, it became evident that they have been able to instill this trait in him.
John's salary of $650 per week is attractive.He will work 9 weeks, which means his income for the period will be just under $6,000 before taxes. From each paycheck will be deducted federal and state taxes plus FICA and Medicare, so John's $650 per week will shrink by about $100. The first lesson of budgeting is to look at your take home pay, not the gross. John and I then discussed what expenses that he will have to pay in order to get to work. He will drive to the train station with his dad but from that point on he needs a monthly train ticket, which is $50 per week. The next question is what will he do for food at lunchtime -- buy daily or brown bag it. He thinks that he will buy a sandwich each day but spend no more than five dollars on it. He may be in for a shock, but that is another $25 earmarked. John is fortunate that his fixed expenses are so minimal and he has $475 left over.
John wants to be able to spend it all on fun activities such as going to concerts with his friends and hanging out on weekends. He also wants to buy a new computer.These are discretionary items and he knows that they can be somewhat flexible. I asked him if he thought about saving any money for the future and he asked "why?" I am never sure if that is a pessimistic or optimistic question.
I did explain to him that even if he put just 15% of his salary into an IRA that he could begin amassing a fortune. John is studying applied math and he laughed at that suggestion although he did concede that it might make his folks feel good.
The point was that John did learn that part of his income would pay taxes, that he has non-discretionary expenses which he cannot control, and that other discretionary expenses that are within his control. He realized that maybe he should save for the future and that it is OK to enjoy the fruits of your labor by making smart purchases.
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