A teenager’s first job gives them a chance to take on responsibility, learn time management skills, and collaborate with new people. It’s also a chance to discover important lessons in personal finance, such as how to manage money and develop financial goals. These lessons build the skills and habits that will shape teens’ financial futures for years to come – and early exposure can help them avoid financial pitfalls. Here are five lessons you can teach your teen when they get their first paycheck.

Understanding Gross vs. Take Home Pay

Your teenager might be surprised when the amount of their first paycheck is less than expected. Let’s say your teen is earning $15 per hour and working 15 hours per week. Mental math might have told them they would earn $225 a week and $900 a month – though is the amount before deductions are taken out (their gross pay).

This is a great opportunity to explain the difference between gross pay and take home, or net pay. Without realizing it, your teen might know that gross pay is the hours they worked multiplied by their hourly wage. Their net pay will be less due to deductions such as federal and state income taxes, and Social Security and Medicare (FICA). The difference between your teen’s gross and net pay might be noticeable enough to give them a reality check – this is the money they really have left to spend. If your teen has their pay stub, you can help them understand each deduction.

Understanding the difference between gross and net pay is important, because their net pay will shape their spending decisions.

Setting Financial Goals

Encouraging your teenager to set financial goals will lay the foundation for lifelong success. Start by helping your teen come up with financial goals that are achievable and personal. Maybe your teen wants to buy tickets to their favorite artist’s concert or buy a gaming console. You can also help them determine if their goals are short, medium, or long-term, depending on the money and time needed. You can also assist them in calculating how much money they should save each month to reach their goal. If your teen’s goal is to save $1,000 to buy a laptop in a year – they would need to save about $84 per month. This will motivate them to make consistent progress toward their goal, since it will give them a realistic number to achieve on a monthly basis.

The Importance of Paying Yourself First

Another way to get your teen in the habit of consistently saving is by encouraging them to “pay themselves first,” and set aside a portion of their income for the future. You can explain that they might not need the funds now, but they’ll be thankful they have them on a “rainy day.” You can illustrate this point with an example. Let’s say your teen saves $20 a month – they’ll have $240 saved in one year that they may have otherwise spent. You can take it one step further by explaining that if someone needed this $240 for an emergency car repair and didn’t have it – they might need to use a credit card instead and potentially pay interest if that balance isn’t paid off right away.

Distinguishing Between Needs and Wants

When a teen is earning their own money, it’s a great time to give a hands-on lesson about distinguishing between needs and wants. Learning the difference will help them build discipline and make wise spending choices. At this stage, your teen might be deciding if items like video games, the newest Stanley tumbler, or the latest sneakers are needs or wants. But one day, they will be asking if an expensive handbag or new car is a need – and if making the purchase would prevent them from reaching more important goals, or falling deeper into debt.

Learn How to Budget

Now that your teen knows where their money comes from, you can help them understand how to manage it with a budget. An effective way to teach budgeting is by using your teen’s monthly income and spending as an example. You can begin with an easy budgeting method, like the 50/30/20 method – where 50% of their income goes to needs, 30% goes to wants, and 20% goes to saving. Let’s return to the example of the teen who makes roughly $900 a month, and assume they take home around $700 after deductions.

They should:

• Spend $350 per month on needs (gas or car payment).
• Spend $210 per month on wants like activities with friends or video games.
• Save $140 for financial goals.

This example might not be exact, but should illustrate how your teen can use a budget as a guide. This will help your teen see where their money is going and build an awareness of their spending habits.

First Financial is dedicated to helping your family build strong financial foundations. If your teen recently got their first job and is local to Monmouth or Ocean Counties, you may be interested in getting them started with a First Financial Student Checking Account. By helping to manage their own account with your guidance, they can understand how banking works and the different tools and resources available to them to build smart money habits for their financial future.

A $5 deposit in a base savings account is required for credit union membership prior to opening any other account. All personal memberships are part of the Rewards First program and a $5 per month non-participation fee is charged to the base savings account for memberships not meeting the minimum requirements of the program. View full Rewards First program details.