Many teens are starting to lock down their summer jobs. For some, it will be their first-time earning money outside of chores around the house and this is a great opportunity to teach a few valuable lessons about money. Budgeting, saving, and investing are three that come to mind; these are lessons that can make a lasting impact on your children as they enter adulthood and start careers.

Budgeting

When I was a teenager with my first job, my parents still paid for almost every expense I had. I didn’t have to buy food or pay for rent, but I did have to buy my own gas for my car. Growing up in rural Vermont, if I didn’t have gas in the tank, I wasn’t going to be doing much of anything. Every time I got paid, I knew I needed to budget a portion of the check towards gas. If I wanted drive all my friends to the mall every week, then I was going to spend a lot of money and potentially not have enough to make it to my next paycheck.

Having one expense that I was responsible for helped me learn that some of my money had to be spent on essentials rather than things I wanted but didn’t need. I had to have enough money for gas to get to work to make money at my summer job. It was a variable expense that I could control. I could drive less or ask friends to chip in for their share.

Although not as complex as managing an entire household budget, choosing at least one expense for your teen to cover while they are making money is a great place to start. It doesn’t matter what you choose – a cell phone bill, clothes, or a certain activity are all great options. Another option is to have a portion of your teen’s paycheck be designated to a charity of their choice. It is important that every penny made isn’t just “fun money”.

Saving

Some portion of the money your child makes should be saved. This is a great time to talk about “paying yourself first.” If your teenager saves a percentage of their paycheck before they start spending it, they will learn to spend only what they have left. This is an especially important lesson before they are old enough to have a credit card in their wallet.

Before your teen starts working, decide together on a set percentage of every check that will be saved. Saving is like flossing or buckling your seatbelt – it’s a simple habit that if learned early will really stick with them. Having a goal to save toward will help encourage young adults to save. Although saving for retirement is great, it is more about the habit and the lessons associated with saving. If saving for something more near term and fun helps, that’s okay too.

Investing

If your child’s savings goal is retirement or another long-term goal you could also introduce some investing lessons this summer. The goal should be at least 3-5 years way if you plan on investing the money.

The most important take away about investing is the amount of growth that can take place if you start early. Compounding returns are extremely powerful. Although minors cannot legally own investment or retirement accounts, many brokerages offer Custodial IRAs allowing parents to act as the custodian of the account while the child is a minor. The assets in the account belong to the child and control is transferred to the child at the age of majority. Minors can contribute to Custodial Traditional or Roth IRAs if they have earned income. Up to 100% of their income or $7,000 (in 2024), whichever is less, can be contributed to either type of account.

Roth IRAs are typically a better option for a young worker. Teens earning less than $14,600 (in 2024) will not have a federal income tax liability, therefore there is no tax benefit to contributing to a Traditional IRA over a Roth. If the Roth IRA is untouched, it may be able to grow for 40- 50 years tax free and withdrawals in retirement will not be taxed.  The benefits of tax-free growth and compounding can best be illustrated by an example:

Let’s assume your teen can save $4,000 in a Roth IRA working a couple of summers before heading off to college. If that money earns on average 6% a year over 45 years and nothing else is ever contributed, the account will be worth over $55,000. In a Roth IRA, those gains are tax free. In a Traditional IRA, the entire amount is taxable when withdrawn. Furthermore, if the child were to contribute $1,000 to the account annually over the same amount of time, the total would be over $280,000!

If your child is working this summer, this is a great opportunity to teach valuable money lessons. No adult has ever said “I wish I learned less about money in high school”. Give your kids a head start now, and they will form habits that they carry with them into adulthood.