However, there are some ways to help your teens make the most of the income from a summer job, not to mention lay the groundwork for great financial habits.
According to a 2015 report from Career Builder, more than half of employers offer summer positions that pay $15 or more per hour, and nearly three-quarters will pay summer hires at least $10 per hour on average. For a teen used to making the federal minimum wage of $7.25, a summer job can be a good way to make a little extra cash.
“When kids have everything they need provided to them, it can be difficult for them to connect their earnings to something meaningful,” says Emilie Goldman, CFA, CFP®, owner of Tamarind Financial Planning . “Saving [money], investing, and the concept of the long term can be challenging as the plan-ahead part of their brain is still developing.”
So, what are some ways to help your teen get started on the right financial track toward fiscally responsible?
“Start to transition some financial responsibilities to your child,” Goldman suggests. Some items that could be shifted from your side of the household budget ledger to your teen’s side include gas, entertainment, and clothes.
Goldman suggests sitting down with teens to talk about how they expect their financial future to play out.
“Help your [children] set financial goals,” she recommends. “Talk to [them] about future expenses that you expect them to contribute to, and connect those goals to their earnings.”
As you shift some financial responsibility to your teen, he or she will learn valuable lessons about income and expenses, expectations, and priorities. Let your teen make more choices in discretionary spending. This will provide practice at analyzing the pros and cons of money decisions.
Help your teen make the most of summer job income with a retirement plan
Your teen can make the most of his or her summer job pay by shifting a portion of the income into a qualified retirement account, like an IRA. The earlier a teen starts with building a retirement savings account, the more time there will be for compound interest to do its job and help build a nest egg.
Goldman points out that even a teen can open an IRA account as long as it is a custodial account you help manage until he or she comes of age . Your child also must earn some taxable compensation income and generally cannot contribute more to that account than their taxable income.
“A Roth IRA has huge leverage for teens,” she says. “Contributions are after-tax, but teens may have little or no tax to pay anyway. Investments grow tax-free and can be withdrawn tax- and penalty-free after age 59 ½.”
However, because many teens struggle with the concept of saving for the far-off future, Goldman recommends requiring your child to set aside a percentage of his or her paycheck toward retirement. The growing balance can be encouraging to a new saver. Connect short-term savings goals to items that motivate your teen so he or she can see an immediate benefit.
Credit card access vs. debit card access for your teen
You may be thinking about adding your teen as an authorized user to your credit card account to help him or her start building a credit history, but Goldman recommends taking it slower. “A better first step is starting a banking relationship,” she says. “Set up a checking account with a Visa or MasterCard debit card and a linked savings account.”
This should help your teen start managing cash flow by being aware of the difference between what he or she earns and spends. (Hopefully, it’s a positive number, but if your teen is spending more than he or she earns, that could become a teachable opportunity.)
A checking account or linked savings account can be set up as a joint account or, if your child is a minor, a custodial account. Every month, review the account with your teen and talk about spending choices. Help create a budget that includes retirement contributions, short-term savings, charitable donations, and other expenses. This process can help your teen connect his or her earnings to any financial decisions.
Your teen can make the most of a summer job when you help him or her begin managing money responsibly. Learning how to spend and when to save will help your teen develop good money habits for later in life when the financial stakes are higher.
Miranda Marquit is a freelance journalist specializing in financial topics. Read more of her writing on Huffington Post, Wise Bread, AllBusiness, and at her website, Planting Money Seeds. Follow her on Twitter: @MMarquit
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