As a parent, you have the opportunity to put your child on the road to a lifetime of financial health. Your child has just landed his or her first job and is excited about earning enough cash for a car, evenings out with friends, an upgraded smartphone and other “must-haves.” The road to financial independence for teens is paved with the same potential potholes we all must steer around: the temptation to overspend, taxes that weren’t on the radar, car repairs and other unwelcome surprises.
Here’s how to help your child manage that new paycheck wisely.
1. Set up bank accounts
Your child may already have checking or savings accounts for birthday or babysitting money. If not, now's the time to sign up and explain how to avoid extra costs like overdraft or ATM fees. Dianna Weaver, SunTrust Investment Services Financial Advisor in west Florida, suggests creating three accounts: a checking account for day-to-day expenses, a savings account for emergencies and an investment account for bigger purchases down the road. "If you start saving and investing right away, it's easier to make it a habit," she says. "Money is a finite resource, so teach your children the importance of setting aside money and paying yourself first." An early start on investing will also give your child the key to long-term financial success: earnings compounded over time.
2. Talk about taxes
Many first-time wage earners are shocked to see how much money is deducted from each paycheck for taxes. This is the time to explain how payroll deductions work and where that money goes: to pay for police officers, public school teachers, parks, state colleges and other public projects. If your child is working part-time, he or she is likely to get much of that money back in the form of a tax refund, but it's still important to get a basic understanding of taxes early on, including taxes that may come but once a year, such as car registration renewal fees.
3. Encourage budgeting
It's all too easy to blow a minimum-wage paycheck on little purchases like pizza slices and music downloads. Seemingly minor expenses like these add up over time, but are often “invisible” to kids (and adults). Have your child decide how much to spend in each category and then track the payouts for a month. "Encourage your kids to know what they plan to spend, then see if they actually spend what they thought they would," Weaver says.
Also explain how work hours translate into purchasing power (for instance, "after taxes, you'll work 15 hours to pay for those designer jeans") and discuss the differences between wants and needs. These lessons will help young workers make more mindful decisions about money down the road.
4. Let them learn from mistakes
If your child is set on making an expensive purchase you think they’ll later regret, step aside. Let them experience buyer's remorse and learn from it. Earnings from a first job are likely to be small, so mistakes are also relatively small compared to the missteps young workers could make later in life. "If they don't make their own mistakes, you're just delaying that lesson until it's more painful with a bigger amount of money," Weaver says.