Summer jobs serve to teach teens facts of financial life

July 11, 2004|By EILEEN AMBROSE

SIXTEEN-year-old Lillian Gibbons earns $7 an hour as a cashier at Valley View Farms garden center in Cockeysville, but the high school junior says she gets a lot more out of the job.

Her paycheck, she says, teaches her a lot about money management, from taxes to the temptations of an ATM card.

"It's a source of constant, dependable income that I didn't have before when doing just babysitting," the Sparks teenager says. "With the paycheck, I'm learning this is how much I make and this is how much money I spend."

For parents, a teen's summer job can be a way to introduce finances and instill sound money skills that can serve a lifetime.

Many children go through school without formal instruction on finances. If parents don't take the initiative, their youngster could head out into the world sorely unprepared to handle credit cards or make basic financial decisions.

And the majority of teens can use the help. The Jump$tart Coalition for Personal Financial Literacy this spring reported that nearly 66 percent of 4,000 high school seniors failed an exam testing their knowledge about income, saving, spending and money management.

So, if your child is headed off to work this summer, here are some issues to discuss:

Gross vs. net income. Teens tend to think in terms of gross income, and may be disappointed unless parents warn them about potential state, local and federal taxes, experts say.

"Kids are always shocked to find out that what they are getting paid by the hour is not what they are bringing home," said Janet Bodnar, author of Dollars & Sense for Kids.

Young employees not working for their parents' business, for example, will have 7.65 percent of their paycheck withheld under the Federal Insurance Contributions Act, FICA, as part of their contributions for Social Security and Medicare.

Many times, too, federal income taxes are taken out of teens' paychecks, although they may not make enough to owe taxes and will get the money back when they file an income tax return the next year, said Bob Scharin, editor of Practical Tax Strategies journal in New York.

Dependent children, though, can avoid having federal income taxes withheld from their paychecks if their total income for the year won't be over $4,850, their unearned income - interest and dividends - won't exceed $250, and they had no tax liability last year, Scharin said.

Gibbons recalls that taxes ate up $40 of her first paycheck and left her with $100. "It wasn't that much, but it still was a chunk," she said. Her father, David Gibbons, recalls her reaction, "When she got her first paycheck, it was, `Who is this FICA guy?' "

Parents can use a child's first pay stub to explain taxes.

"The biggest thing they need to explain is how the tax system in the United States works," said Andy Keeler, a financial planner in Dublin, Ohio. "The idea is at some point in time those taxes will come to benefit them through sidewalks being maintained or the ability to go to a public school without paying for it."

If parents are comfortable sharing their financial information with a child, they can show a teen their own paychecks, said Donald Fell, president of the Florida Council on Economic Education in Tampa.

Parents will likely have even more deductions that can prompt discussions. For instance, contributions to a 401(k) plan can get parents and teens talking about saving for retirement, Fell said.

Saving. Teens should be encouraged to save a portion of each paycheck, experts say.

Some suggest a minimum of 10 percent, while others say teens earning a couple of hundred dollars a week can be expected to sock away half that to pay for a major expense, such as a car or a computer for college.

"The amount is not important. ... It's the discipline of saving that's important," said Michael Furois, a financial planner in Phoenix, Ariz.

Parents can encourage savings, too, by matching every dollar a child saves and putting the money into an individual retirement account at summer's end, Furois said.

Young workers also can deposit their savings in a savings account, money market account or a short-term certificate of deposit, where they'll learn about interest, experts say.

And teens getting an ATM card for convenience will get a quick lesson on how easy it is to make deposits - and withdrawals.

Gibbons, for instance, says she used to spend $20 a week until she got her ATM card last month. "I can run through 100 bucks a week if I didn't watch myself," she said.

Setting goals. Of course, saving will be a lot easier if young workers have goals.

Parents should encourage teens to develop short- , medium- and long-term goals, experts say.

It's a balancing act that they will be expected to make as adults, when they find themselves juggling monthly living expenses on top of, say, saving for a down payment on a house and retirement, experts said.

Some teens have no problem with goals.

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