In a typical summer, more than 20 million teens between the ages of 16 and 24 have summer jobs. For many kids, this means they are earning their own income for the first time in their lives.
While they may want to spend their entire paychecks on clothes, music, or video games, it is important to teach kids the basics of budgeting with their summer income. Doing so will not only help them be more responsible with their summer paychecks, but can also teach them the tools to be better with money as young adults.
Setting financial goals
No matter how small their paycheck is, it is never too early to start setting financial goals. Have your child brainstorm what they would like to do with their money: do they want to save for a car? Start a college fund? Help pay for a spring break trip? Establishing financial goals and having a clear picture of what they want can help them be more responsible with their spending.
Once you’ve established what your child wants to do with their summer income it is time to create a budget. In its simplest form a budget tracks the income coming in and the expenses going out. Recording their spending for a month can help kids make smarter financial choices; a daily
Starbucks run might seem like a minor expense until you see it can add up to hundreds of dollars each month.
Spend, save, and donate
One of the best ways to create a budget is to divide income into three categories: spend, save, and donate. As a general rule kids should aim to save 50%, spend 40%, and donate 10% of their income. Creating a budget in this way still gives them the freedom to make their own purchasing decisions while saving towards a larger goal and helping others. For older teens and young adults consider adding an investment category; learning about mutual funds and investments might seem intimidating, but it is a good way to teach teens the basics of building wealth.
Don’t forget about taxes
If your teen has a summer job, they will more than likely need to file their own taxes at the end of the year. When working part time during the summer, advise them to file zero exemptions on their W-4 to ensure they aren’t paying out of pocket at tax time. Parents can continue to file taxes with their children as dependents, even if they are working part time as long as the child doesn’t pay for more than half of their living expenses.