We sat down at the kitchen table, spread-out the documents, and read through each of them – one by one. It was a great chance to discuss what these forms accomplish. This allowed my son to consider what to expect, from a deduction perspective, once he gets paid. This is his first real working opportunity, and based on his total estimated earnings, it’s likely his tax withholdings will be small. That’s okay, as the purpose is to get a little experience in exchange for his time. Having the freedom to make choices with money earned is a great thing for all teenagers.
One of the forms we reviewed and completed was W-4. We’ve spoken to our clients about the value of updating this document earlier in the year during our reviews. Form W-4 allows you to indicate how much should be withheld for federal income taxes. This form has been updated to reflect tax changes so that you can better estimate withholdings based not only on your income but on the entire household as well. You may add additional withholding amounts if you would like to ensure that you get a refund instead of a tax bill when it comes time to file . Quick tip: if you find yourself/family owing more taxes than anticipated this year (based on 2019 income) the best thing you may do for your future financial self would be updating your W-4. Once completed you may provide it your company’s HR department and check your paystub in a couple weeks to ensure the changes took place.
Back to teenage financial matters… We connected with our bank and we were able to get a personal checking account set up for our son that would also allow for direct deposit. Our son has had a savings account for years that has given him a place to formally deposit cash beyond the various plastic Tupperware containers in his room which he has labeled for saving, spending, and giving. It was important to us that we set up a “teenage financial plumbing system” so his pay may be directly deposited to his checking account. Furthermore, we were able to get a debit card ordered and provide him online access to view his balance. This will allow him the freedom (and ability) to make purchasing decisions based on the money he earns. We feel it best to decline overdraft protection on these accounts to avoid over-spending. Hopefully, this will be a good life lesson on the value of “living with his means”. Having access to online banking helps to know what money arrives and when, which aids critical thinking about how it may be spent or saved. This is really empowering from a financial decision-making perspective.
I believe all of these steps are important for teenagers so that they may really “buy into their finances” and learn how to be smart about spending, as well as saving, as early as possible. No textbook or online learning here, this is the real thing! The spending and saving habits young adults learn are usually traced back to their parents. How parents spend, save, give, and live – I believe, to some extent, influences how their children treat money as they grow-up. We have three boys and each of them views and treats money differently. It will be interesting to see how our oldest makes decisions with his earned income.
Of course, in a “perfect world”, my son has naturally absorbed all the good money decisions in our house and ignored the bad decisions so he may increase his probability of success with money (ha-ha, insert laughter here!) Here’s the reality check – he is still a teenager! Who knows what will happen next? I imagine that he will make some good choices (and perhaps some suboptimal choices too) concerning saving and spending. These decisions will be based on his own priorities as to what he believes is important. This is totally acceptable and how learning works. The best lessons learned about money, are learned by doing. The foundation of good financial decision-making arrives with time and we learn by making these decisions, both good and bad.
In the spirit of thinking beyond a checking account, we’ve also discussed investments. In the past, we’ve talked about the monthly contributions we, as parents, make monthly into 529 savings plans for college. These dollars have a specific job description, timing, and purpose. With the idea of earning income, my son has voiced an interest in “investing”. Not for college per say, but for having some investment that will help him down the road. I shared with him the same advice I share with our clients, which is getting your cash and liquidity needs met first is priority number one. Too many problems are created when you lead with investing before assessing an appropriate cash reserve. Life happens, and so does the unexpected. You can find yourself in a situation that requires emergency cash, and without having planned for that, you might be stuck. Cash matters, and having it available is important. Investing is also important, but without a good plan for both, you can find yourself in a pinch.
I do want to encourage my son to invest, and I want to educate him on how to do so efficiently. Before we do that, he understands there will need to be some cash in the bank to cover life’s unexpected emergencies.
Advisory services through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Flowerstone Financial are not affiliated.