As a parent, I strive to ensure my children are more financially savvy than I was. Even if they’re not yet diving into summer jobs, it’s never too early to get ready. To help, I consulted with Alex Thompson, a financial expert and author of “Raising Money-Smart Kids.” Here are his eight top pieces of advice for navigating their first paychecks.
1. Define the Purpose of Their Earnings
“Before anything else, it’s crucial to establish what this money is for,” says Thompson. Is it meant for college savings, charity, or a car? “For instance, parents might agree to cover the basics for a vehicle, but any upgrades must be funded by the teen. Setting clear expectations from the start will guide how the money is allocated.”
2. Adopt a Spend-Save-Give Strategy
“If your family is fortunate, consider dividing the money into three equal parts for spending, saving, and giving,” Thompson suggests. This can expand on the allowance jar system many parents already use.
3. Empower Them to Make Spending Choices
“I advocate for allowing teens to choose how they spend their ‘spending’ portion. As long as it doesn’t include items on your household’s ‘no-go’ list, let them decide what to buy,” Thompson adds.
4. Assign Responsibility for New Expenses
For example, Thompson recommends, “A third of their summer earnings could go toward clothing or transportation costs. Giving them larger sums to manage is essential preparation for their future as college students and adults. As Thompson notes, “It cultivates patience.”
5. Embrace Mistakes as Learning Opportunities
“At this stage, money should be a learning tool. Mistakes will happen and can even be amusing. It’s best for them to make errors while still living at home rather than facing serious consequences later on,” Thompson explains.
6. Let Them Face the Consequences
If they run out of money for clothes, it’s a valuable lesson—mom and dad won’t swoop in to save the day.
7. Teach Them About Taxes
One of the most eye-opening aspects of their first job may be the realization of how much is deducted from their paycheck. “Many young adults don’t grasp the concept of taxes,” says Thompson. It’s vital to discuss this while they’re still at home, rather than when they’re out on their own.
8. Encourage Opening an IRA
“Thinking about future finances can be challenging for teens,” Thompson remarks. “However, saving early can lead to significant rewards.” If a teen starts contributing to an IRA at 19, they could potentially become a millionaire by age 67. Delaying until 25 could mean losing out on $330,000. If possible, consider matching their contributions to a Roth IRA to motivate them even more.
In conclusion, I wish I had begun saving for retirement at 19. At the very least, we can establish a balanced approach to spending, saving, and giving. Our list of banned items includes things like cigarettes, gambling games, and overpriced subscription clubs. For more insights on parenting and financial literacy, check out our other blog posts, such as those on home insemination and infertility resources, which can offer valuable information for your journey.