Financial Literacy for Children: Episode 2 – What is a budget?

“The simplest definition of a budget is ‘telling your money where to go.’”

― Tsh Oxenreider, author of “Organized Simplicity: The Clutter-Free Approach to Intentional Living.”

Previously, on BYJU’S Piggy Bank:

• Here’s how to talk to your child about money matters 
• Financial Literacy for Children: Episode 1 – Introduction to Money 

In Episode 1, we learnt about the concept of money. We now know that people earn money by working or receive money as a gift. People use their money to buy the things they need or want. In Episode 2 of BYJU’S Piggy Bank, we are going to discuss how people make spending decisions. 

We will cover:

• How do people make spending decisions?
• What is a budget?
• Why does everyone have a different budget?

(Parents can read the sections at a pace appropriate for their child and then solve the worksheet together.)

How do people make spending decisions?

People earn money so that they can spend it on things they need or want. Sometimes, they have money to buy everything they want or need, but there are occasions when they have to decide which specific items they will actually buy since they may not have enough money to buy everything on their list. 

Have you ever had to pick between two things you liked, wanted, or needed?

It is hard, isn’t it – choosing just one thing out of everything you want or need. 

Exercise: Think about a time when you had to pick between two things you really wanted. How did you decide? 

What is a budget?

Sometimes people want to buy many things but do not have enough money to buy them all. In such cases, they choose which things they need sooner and identify which things can wait for later. They do this so that they can fit all of their needs in their budget. 

Budget (verb) means to plan carefully how much money to spend on something. 

For example:

• • Tara earns ₹100 every month, and she has set aside ₹10 for buying games every month. This means that Tara cannot spend more than ₹10 to buy games this month. She can only buy a game that costs less than ₹10 or exactly ₹10. 
    • Why does Tara have a budget? Why can’t she spend more than ₹10 on a game? 
    • She does this budgeting to ensure that she can buy a new game every month, instead of buying one expensive game every year and not having enough money to buy games for the rest of the year.
  • Ayan earns ₹100 for working in an office. He has decided not to spend more than ₹70 per month. This means that Ayan has to make sure that the total cost of everything he needs and wants – food, clothes, rent, or entertainment – is not more than ₹70. 
    • Why does Ayan do that? Why can’t he spend the whole ₹100?
    • Ayan does not know what is going to happen in the future. So, he keeps some money aside for the rainy days. He might be saving his money in a piggy bank, just like you do.

A typical household budget can be monthly, yearly, or for a particular event such as a birthday party or a holiday. 

 Exercise: Everyone needs to eat, so all households have a grocery budget. Make a list with all the grocery items that your parents would think of buying when going out to shop. Discuss your household grocery budget with your family. Try to find out the reasons for this budget.

Why does everyone have a different budget?

People need and want different things, and earn different amounts of money, so everyone’s budget is different. They allocate their money differently.

Allocate (verb) ​means to give something officially to somebody/something for a particular purpose.

For example:

• Leo has allocated ₹100 in his yearly budget for buying sports equipment as they tend to get damaged when played with regularly. Leo has allocated only ₹30 for buying books since he lives near a library. 
• Samira has allocated ₹50 in her yearly budget for storybooks as she is an avid reader and ₹100 for travelling to a new place this summer because she loves to travel. 

Exercise: Apart from basic needs like food, clothes, and shelter, what would you want to include in your budget when you grow up?

Did you find this article helpful? Share your thoughts, feedback and suggestions with us in the comment section below or drop a mail at storyweavers@byjus.com. 

Disclaimer: This blog has been written for children between the ages of 5 and 7. The information has been presented accordingly. Parental discretion is advised. 

<Download the worksheet here>

Next in this series, 

• Financial Literacy for Children: Episode 3 – Needs Vs Wants 
• Financial Literacy for Children: Episode 4 – What are Savings? 
• Financial Literacy for Children: Episode 5 – What is Investing?