Help your teen manage their first paycheck with these essential financial tips
Your teen’s first job is an exciting milestone, one that marks their entry into the world of financial responsibility. While your teen may focus on the immediate rewards of that first paycheck, teaching them how to manage their money effectively from the start is one of the most valuable lessons you can offer. Whether it’s helping them open their first bank account or encouraging them to start saving, take this moment as an opportunity to empower your teen to make informed decisions about their money—now and for the years to come.
Help Them Open a Bank Account
As your teen begins to earn money from their first job, opening a bank account can help them manage their earnings easily. Having a bank account not only offers them a safe place to store their money, but it also provides them with essential banking skills that will be useful throughout their adult life.
They should, at the very minimum, have a checking account for their day-to-day spending, but a savings account is a great way to help your teen store money for the future from the get-go.
Do your research to find the best account and help them get started with everything they’ll need to know about managing the account, which may include:
- Avoiding fees – Help your teen understand common fees associated with checking and savings accounts, such as overdraft fees or ATM withdrawal fees. Show them how to keep track of their balance to avoid overdrawing their account, and set up account alerts or notifications to stay on top of spending.
- Using a debit card wisely – If your teen receives a debit card with their account, teach them the importance of using it responsibly. Show them how to use it for purchases, withdrawals, and even paying bills online, but remind them to always check their balance to avoid overspending.
- Setting up automatic transfers – If you choose to open both a checking and savings account for your child, teach your teen how to set up automatic transfers between their accounts to make saving easier.
Having a bank account will empower your teen to take control of their money and build a solid foundation for their financial future.
Encourage Saving First, Spending Later
When your teen gets their first paycheck, they’ll undoubtedly feel the urge to spend all of that hard-earned money on the things they want. But, teaching them the importance of saving first before indulging in their wants is a crucial step in developing good financial habits. Saving is the foundation of financial stability, and it helps teens develop discipline and foresight, two qualities that will serve them well throughout their lives.
By saving regularly, your teen will build a financial cushion to give them security and flexibility as they grow older. Saving also gives them a sense of achievement, knowing that they are working toward something meaningful—whether it’s a long-term goal like a car or short-term goals like fun activities or gear.
Before they get their first paycheck, encourage your teen to save a percentage of their paycheck. A common recommendation is to save at least 20% of their earnings, though you can adjust this based on their specific goals. The key is to create the habit of saving regularly and setting a portion of their income aside before they start thinking about spending.
Teach About Taxes and Withholding
For many teens, their first paycheck comes with a surprise: taxes.
Taxes are an unavoidable part of life, and getting a solid grasp on them early will give your teen a clear understanding of how their pay is calculated and why it’s important to plan for taxes in future jobs.
Once your teen receives their first paycheck, take the time to sit down with them and go over their pay stub. Explain that this document will show them how much they earned and how much was deducted for taxes and other withholdings.
Here’s a breakdown of the most common deductions they will see:
- Gross Pay: The total amount your teen earned before any deductions are taken out.
- Federal Income Tax: Tax deducted by the federal government based on how much they earn.
- State Income Tax: Tax deducted by state governments if you live in a state with income tax.
- Social Security and Medicare (FICA): Taxes taken out of every paycheck to fund the Social Security and Medicare programs.
By going over each of these deductions with your teen, you can help them better understand how their income is affected by taxes and other withholdings.
If your teen’s income is below the standard deduction for the year, they may not be required to file taxes. However, even if your teen earns less than the standard deduction and isn’t legally required to file, it might be a good idea to file anyway as they may be eligible for a tax refund. When the time comes, walk your teen through the process of filing a tax return, showing them how to claim any refund they might be owed.
Introduce the Concept Of Investing
As your teen begins to manage their paycheck, it’s a great time to introduce them to the concept of investing. The earlier your teen starts investing, the more time their money has to grow.
Unlike a savings account, investing in stocks or bonds can lead to higher returns as the investments mature.
While minors are not legally able to open their own investment accounts, that doesn’t mean they can’t start investing. The most common way for a teen under 18 to start investing is through a custodial account. These accounts allow a parent or guardian to manage the account on behalf of a minor until they reach adulthood. With a custodial account, your teen can buy and sell investments, such as stocks or bonds, but the account remains under supervision until they are legally able to take control of it.
Specifically, a Custodial Roth IRA is a type of managed retirement account for a minor where investments grow tax-free. If your teen starts contributing to a Custodial Roth IRA at a young age, they will have several decades for their investments to grow, and by the time they’re ready for retirement, they could have a significant nest egg built up.
Even if your teen is not ready to invest real money yet, you can introduce them to investing concepts with simulation apps. Many platforms, like Investopedia’s Stock Market Simulator, give your teen the opportunity to simulate stock market trading with fake money. This is a risk-free way for your teen to practice buying and selling stocks, building their knowledge of how the stock market works and gaining confidence for when they can start investing with real money.
Your teen’s first job is an opportunity to teach them valuable life skills that will shape their financial future. From understanding the importance of saving to learning how to navigate taxes, these early lessons will help them build a solid foundation that will serve them for years to come. Take this moment as an opportunity to guide them through this process and equip them with the tools they need to become a financially independent and responsible adult.