With a teen’s first job comes all kinds of teen money questions, like how much should a teenager save from their paycheck? Does a teen pay taxes? 7 money conversations you need to have.
Congrats, Mama Bear. Your teenager – who used to be your three-nager – has taken a huge step out into the real big world by getting their official “teen first job”.
They may have even gotten their first paycheck.
This is a biiiiigggg milestone!
Maybe they drive themselves. Maybe they’re hitting you up for transportation.
Maybe they work on weekends, or only just a few days a month.
Whatever it looks like, it’s ending with a beautiful (albeit, small) paycheck in their name.
Today I want to help guide you through the money conversations to have with your teenager once they start earning their first paycheck.
Remember alllll the Way Back to YOUR First Job
Do you remember the awesomeness of getting that first paycheck as a person still living under your parents’ roof (pssst: that’s right, I’m not talking about the first paycheck from a job-job where you realized you’d have hardly anything left at the end of the month)?
With the help of my Dad, I had gotten a job at a local horse farm to muck out horse stalls. There were several raises along the way, but it tapped out at $98/week.
This was a small fortune to a 15-year old!
So, when was your first paycheck?
- How old were you?
- What teen financial responsibilities did you have at that point in time?
- How much did you make each paycheck, and how often were you paid?
- How long did that job last?
This will help you in figuring out how you want to address the following topics with your own teenager.
Other topics you might want to check out? Here are 25 online jobs for teenagers, 11 teen job apps, and here's what to do if your teen needs a job but doesn't have a driver's license.
Conversation #1: What’s Your Banking System?
It’s likely that before this first paycheck, your child just had money here and there to use. Maybe they have a savings account, maybe they don’t. Maybe they have a checking account, maybe they don’t.
Since income is going to be a bit more consistent going forward, it’s time to get clear on your teen’s banking system (and to help them understand how it all works).
As in, how does money come into it? How does money leave it? And how can they set aside money in a safe location?
- Open a Checking Account: A checking account is the primary way kids can spend their money, and a place to hold it when they intend to spend it soon. Will they use direct deposit from their employer? Or will they manually deposit the check into this account (in which case, you should set up a banking schedule for when you take them to the bank if your child doesn’t drive themselves).
- Open a Savings Account: A savings account is a safe place (FDIC-insured, plus not in their mattress or mason jar where it could get stolen) for them to save money – or at least put it when it’s not going to be spent in the near future.
- Associate the Accounts: You’ll want to make saving money (and, consequently, covering checking account shortage oopsies) easy by having your teen link their two accounts together. This way they can do automatic/manual withdrawals from each other.
- Discuss the Differences in Ways to Pay: You want your teen to be fluent in spending their money (though, of course, hopefully they won’t spend it all!). This means teaching them the difference between writing checks versus using a debit card, versus using a credit card. Take one transaction that they want to make, and walk them through the three different ways in a conversation. Point out the pros and cons, such as when you write a check, it takes several days to process before it’ll show up on your account, so it’s possible the balance you see is not accurate, versus a debit card transaction almost instantaneously updates. Credit cards? Well, they’re a whole different story.
Bonus Tip: Make them aware of the consequences when over-withdrawing on their new banking system, such as an overdraft fee (they’ll choose whether to allow overdrafts or not when the account is first opened. If they don’t allow it? Then there are no fees…but the transaction gets denied). Here are 50 banking activities for kids and free banking worksheets (PDFs) to help them understand things better.
Conversation #2: You Will Be Paying Taxes
Do teenagers pay taxes?
There are two different sub-topics to cover having to do with “taxes.”
Your teen will likely need to both a) file taxes by the April deadline, and b) pay taxes. And yes, filing taxes for the first time can feel really intimidating as a teenager!
Here are some conversation pointers around this topic:
- Taxes Deducted from Paycheck: Whenever I work with kids, the overwhelming response I get when I tell them the government takes money out of their paycheck for taxes is a row of bug-eyes and repulsion. Some have gone so far as to call the government greedy. This is an excellent time to expand + shift your child’s thinking about the taxes being taken out of their paycheck. You can start with pointing out 2-3 places the money gets spent on that directly benefits them (such as to fund their education if they go to a public school), and then point out 2-3 places the money gets spent that directly benefits people they love (for example, will their social security taxes help with grandma's social security check?).
- Filing Taxes Each Year: The second part to this is notifying them that they’ll (likely) need to file taxes by the April deadline each year. Whether or not they will need to file taxes depends on the source of their income, and the amount of it. They’ll likely receive a W-2 or other tax document from their employer(s). Even if they don't owe any money, you should know that filing means they will get into a good money habit of filing taxes, AND, they might be entitled to a refund of taxes owed (since they likely aren't earning very much).
Here’s a great guide by ConsumerFinance.gov on teens and taxes.
Conversation #3: How Much Should a Teenager Save from a Paycheck?
Not only should you and your teenager figure out how much they should save from their paycheck, but you should help them set their first savings goal.
Psst: here's 9 reasons teens should be saving money.
I just love the subject of setting a savings goal, creating a savings plan, and seeing it through. In fact, I created an entire program called the Everest Money Simulation that goes through all of this during one wild ride.
Now’s the time – while your child has actual money coming through the door, on a semi-consistent basis, that they’ve made sacrifices to get – to teach them the power of setting a savings goal, backed up by a solid plan for how to get there.
To set a savings goal, you’ll want to:
- Talk Out their Goals: What does your child want to do/be/have? Ask them.
- Help Them Prioritize ONE Savings Goal: Your teenager probably wants many things – we all do! So, use this 1-page Money Goal Finder to narrow down all their wants to just one. The one that will give them the quickest win!
To figure out how much a teen should save from their paycheck, you'll need to figure out what their new money responsibilities are going to be now that they're getting paid (see below), what the allowance shifts look like in your household, and what you expect them to save up for.
Conversation #4: Define Shifting Money Responsibilities
I love this one, because it gets you to think beyond the usual conversations (such as that you have to pay taxes and you should save at least 10%) and instead think about using their first paycheck to start defining shifting money responsibilities.
What will your child be responsible for paying for, and what are you, the parent, going to be responsible for moving forward?
Suze Orman’s 17-year-old niece had something very interesting to say:
“The students who get both a paycheck and money from their parents say they work because they want to feel independent, get work experience and like making their own money. But they also don’t feel pressure to hang on to their money. They know their parent is a safety net; if they can’t cover a purchase from their paycheck, Mom or Dad will likely help. Students who don’t get any money from their parents have a different relationship with money. They look at every potential purchase and calculate how many hours of work it will take to have the money to buy the item.”
You may not be ready to completely shift buying responsibilities to your teen – especially since they’re, well, just a teenager.
But the way you can introduce some money responsibility + money lessons is by handing a category of spending over to their responsibility plate.
Which means…they'll need to start budgeting their paychecks. Here's a freebie for you to help them do that:
Conversation #5: Allowance Shifts Now that They’re Earning Money
How is allowance or chore commissions going to shift in your household now that your teen is making their own money?
Do you continue giving them the same amount that they were getting before, do you scale back, does the amount they earn need to now go into a college savings fund? Lots of questions to address here.
Keep in mind that part of the money you give them may be for them to take care of some of their necessities, such as school clothes, school lunches, or things of that nature.
Example shifts you might make:
- Lower allowance amount to just the necessities they need money for, such as their weekly lunch money
- Chores moving towards community chores, meaning they now are unpaid as a contributing member of the household (if you were paying before)
- Giving them bigger projects as paid chore opportunities throughout the house (such as cleaning part of the garage, taking the car to be cleaned/detailed, etc.), instead of daily chores being paid (if you’re paying for chores)
- Making them responsible for paying for weekend outings with friends
Conversation #6: You have the power to Become a Millionaire BEFORE You’re My Age
Your teen’s first paycheck is the perfect opportunity to show them that their greatest asset right now is TIME.
Show them what saving 10% or 20% or 50% of their current paycheck could grow to in 10, 20, and 30 years. Sit down with them and their first paycheck, and plug in the numbers using this calculator.
Help your teen choose their first teen budget worksheet so that they can stay ahead of their expenses and keep their eyes on the “millionaire prize”.
Conversation #7: Give them Your Paycheck Expectations
What are your overall paycheck expectations? Does your teen get free reign? Do you expect them to set a certain amount aside for college?
You both need to sit down after the first paycheck is earned (or even before!), and figure out what percentage is appropriate for them to spend (here are 58 common teen expenses), and what percentage is appropriate for them to save.
What financial responsibilities do they now have to be paid from their paychecks?
What financial goals do you have for them, and what financial goals do they have for themselves? (like I was saving up to go to Spain for 6 weeks + a car + car insurance + gas)?
For example, in my interview article about how the Amish deal with their kid’s paychecks, Father Leroy used a 10/10/80 rule, with 10% for spending, 10% for investing, and 80% to his household. Each year of employment, his teens increase the investment amount + spending amount, and the amount they have to give to the household is decreased.
Which conversation are you most excited about having…and which makes your stomach turn? Let me know in the comments below and I'll see if I can help.
Amanda L. Grossman
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