Tips for Teens and Young Adults Managing Their Finances

Navigating Summer Employment: Tips for Teens and Young Adults Managing Their Finances

Summer jobs have long been a rite of passage for teens and young adults, offering more than just a way to earn extra cash. These early work experiences play a crucial role in personal and professional development, laying the groundwork for future financial independence and career success. As summer approaches, many young individuals will embark on their first foray into the workforce, making it essential to understand the myriad benefits that come with summer employment and how to manage the finances that follow.

Taking on a summer job is a significant step toward adulthood, teaching responsibility, time management, and the value of hard work. For many teens and young adults, a summer job represents their first encounter with earning money independently, providing a sense of pride and accomplishment. This newfound financial independence can be a powerful motivator, encouraging young people to set goals and make informed financial decisions.

Understanding Your Paycheck

Gross vs. Net Pay

• Gross Income: This is your total earnings before any deductions. It’s the starting point for calculating your net income.
• Net Income: Also known as take-home pay, this is the amount you actually receive after all taxes and deductions are subtracted from your gross income. This is the figure you should use for budgeting and planning your expenses.

Withholding and Taxes

• Income Tax Withholding: Employers withhold a portion of your paycheck to pay federal and state income taxes. The amount withheld depends on factors such as your income level and the information you provided on your W-4 form (e.g., number of dependents, filing status).
• FICA Deductions: This includes Social Security and Medicare taxes. These deductions are mandatory and contribute to the social safety net programs that you may benefit from in the future.
• Adjusting Withholdings: If you find that too much or too little is being withheld, you can adjust your W-4 form to better match your tax liability.

Budgeting and Saving

Creating a Budget

• List Your Income: Start by listing all sources of income, including your summer job earnings and any other money you receive regularly.
• Track Expenses: Write down all your regular expenses. Categories might include transportation, food, entertainment, savings, and any bills you need to pay.
• Set Spending Limits: Based on your income and expenses, set spending limits for each category. Ensure that your total expenses do not exceed your income.
• Monitor and Adjust: Regularly review your budget to track your spending. Adjust your spending limits as needed to stay on track.

Saving for Goals

• Identify Goals: Determine what you want to save for, whether it’s college tuition, a new car, a trip, or a future investment. Make your goals specific, measurable, achievable, relevant, and time-bound (SMART).
• Create a Savings Plan: Calculate how much you need to save each month to reach your goal by your target date. Set up a dedicated savings account if possible to keep your savings separate from your spending money.
• Automate Savings: If your bank offers automatic transfers, set up a recurring transfer from your checking account to your savings account to ensure you save regularly without thinking about it.

Emergency Fund

• Why You Need It: Having an emergency fund means you won’t need to rely on credit cards or loans in case of unexpected expenses, such as medical bills or car repairs.
• How to Start: Aim to save at least $500 to $1,000 initially. Over time, try to build up to three to six months’ worth of living expenses. Start small by setting aside a portion of each paycheck into your emergency fund.
• Consistency: Make regular contributions to your emergency fund, even if they’re small. The key is to save consistently.

Avoiding Impulse Spending

• Think Before You Spend: If you’re tempted to make an impulse purchase, take a moment to ask yourself if it’s something you really need or if it aligns with your financial goals.
• Create a Waiting Period: Implement a rule that you must wait 24 hours before making a non-essential purchase. This cooling-off period can help you determine if you really want the item.
• Use Cash: Pay with cash instead of a card for discretionary spending. This makes it easier to see how much you’re spending and helps limit unnecessary purchases.
• Plan Your Spending: Allocate a specific amount of money for fun and entertainment in your budget. Stick to this limit to prevent overspending.

Managing Bank Accounts

Choosing the Right Bank Account

Savings Accounts

• Purpose: Ideal for saving money and earning interest.
• Features: Typically offers interest on the balance, has lower fees, and allows limited withdrawals.
• Usage: Best for setting aside money for future goals, like college or a car.

Checking Accounts

• Purpose: Designed for everyday transactions.
• Features: Allows unlimited transactions, access to debit cards, checks, and often has online bill pay.
• Usage: Best for managing daily expenses, such as food, transportation, and entertainment.

Using Online Banking

• Mobile Apps: Most banks provide mobile apps that allow you to check your balance, transfer funds, deposit checks, and pay bills from your smartphone.
• Online Bill Pay: Simplifies the process of paying bills by allowing you to schedule payments directly from your account, ensuring you never miss a due date.
• Automatic Transfers: You can set up automatic transfers to move money from your checking to your savings account regularly, helping you save effortlessly.
• Alerts and Notifications: Set up alerts for low balances, large transactions, or upcoming bill payments to stay on top of your account activity.

Monitoring Account Activity

• Check Balances Regularly: Make it a habit to check your account balance frequently. This helps you stay aware of how much money you have available and avoid accidental overspending.
• Review Transaction History: Regularly review your transaction history to ensure all transactions are accurate and authorized. Look for any unfamiliar charges that could indicate fraud.
• Set Up Notifications: Use your bank’s online banking tools to set up notifications for low balances, large transactions, or unusual activity. These alerts can help you catch issues early and take action if necessary.
• Avoid Overdrafts: Understand your bank’s overdraft policies and fees. To avoid overdrafts, keep track of your spending, and consider linking your checking account to a savings account for overdraft protection.

Building Good Financial Habits

Understanding Credit

Credit Scores

A credit score is a numerical representation of your creditworthiness, typically ranging from 300 to 850. It is influenced by factors such as payment history, amounts owed, length of credit history, new credit, and types of credit used. A good credit score can help you secure loans, rent apartments, and get better interest rates on mortgages. It also affects your ability to get utility services and even impacts job applications in some industries.

Building Credit Responsibly

• Start Early: Consider starting with a secured credit card or becoming an authorized user on a parent’s credit card to build your credit history.
• Make Payments On Time: Always pay your bills on time. Late payments can significantly harm your credit score.
• Keep Balances Low: Maintain low balances on credit cards to improve your credit utilization ratio, which is a key component of your credit score.

Using Debit and Credit Cards

Debit Cards

• Pros: Directly linked to your bank account, no interest charges, and helps in budgeting by spending only what you have.
• Cons: Limited fraud protection compared to credit cards, no credit score improvement.

Credit Cards

• Pros: Builds credit history, better fraud protection, rewards and cash back programs, emergency credit access.
• Cons: Risk of accumulating debt, interest charges if not paid in full each month.

Tips for Responsible Usage

• Pay in Full: Always pay your credit card balance in full each month to avoid interest charges.
• Monitor Spending: Keep track of your spending to ensure you stay within your budget.
• Use for Essentials: Use credit cards for necessary purchases rather than discretionary spending to avoid unnecessary debt.

Tracking Expenses

• Budgeting Apps: Apps like Mint, YNAB (You Need A Budget), and PocketGuard help track income, expenses, and savings goals.
• Expense Tracking: Apps like Expensify and Goodbudget can help you categorize and monitor your spending patterns.
• Manual Tracking: Spreadsheets or simple notebooks can also be effective for those who prefer manual tracking.

Learning About Investments

Basics of Investing

• Savings Accounts: Basic, low-risk investment with a fixed interest rate. Good for emergency funds.
• Certificates of Deposit (CDs): Offer higher interest rates than savings accounts with fixed terms and penalties for early withdrawal.
• Stocks and Bonds: Stocks represent ownership in a company, while bonds are loans made to a company or government. Both have varying levels of risk and return.

Starting Early

• Compounding Interest: The earlier you start investing, the more time your money has to grow due to compounding interest.
• Beginner-Friendly Platforms: Consider using platforms like Robinhood, Acorns, or Betterment, which offer easy access to investment opportunities for beginners.

By understanding credit, using debit and credit cards responsibly, tracking expenses, and learning about investments, teens and young adults can build strong financial habits. These habits will serve as a foundation for achieving financial independence and success in the future.

As summer employment offers a valuable opportunity for teens and young adults to earn money and gain financial responsibility, integrating smart financial practices with legal insights can be transformative. At Thomas Kerns McKnight, LLP, we recognize the importance of starting on the right financial foot, particularly when you're entering the workforce for the first time.

Why Legal Guidance Is Key for Young Workers

1. Understanding Employment Rights: Knowing your rights as an employee, including fair pay, safe work conditions, and nondiscrimination policies, is crucial. Our team can provide guidance to ensure you are treated fairly and legally at your summer job.
2. Contract and Agreement Reviews: If your job offer comes with a contract or any formal agreement, understanding every clause is essential before signing. We can help clarify any legal language and ensure that your interests are protected.
3. Financial Planning and Protection: Beyond earning and saving, understanding how to protect your finances legally can save you from potential pitfalls. Whether it's setting up your first bank account, understanding taxes, or managing your earnings, our legal advisors can provide the necessary counsel to ensure your financial stability.

Whether it’s your first summer job or you're returning to seasonal employment, taking the time to understand your financial and legal standing is invaluable. With proper planning and the right legal backing, you can make the most of your summer earnings and set a precedent for future financial success.

Call today

Are you a teen or young adult preparing for summer employment? Reach out to Thomas Kerns McKnight, LLP for expert advice on navigating your employment rights and planning your finances. Let us help you build a solid foundation for your financial future. Contact us today to ensure you’re fully prepared for your summer job journey!

‍