What to do with your first paycheck as a teenager: Smart money moves

Getting paid is a fabulous feeling at any age. But there's something extra sweet about your first paycheck as a working teenager. That first check delivers some freedom to do what you want. But it's also a reflection of the responsibility and hard work you've put in to earn that money in the first place. That commitment deserves celebration, but you also need to nurture it.

As tempting as it is to spend that first paycheck on something big, it's a great opportunity to start practicing smart money habits. Here, we explore what to do with your first paycheck as a teenager to help you improve your financial responsibility while still having a little fun.

First step: Understanding paycheck deductions

Your paycheck has two amounts: a gross amount and a net amount. The gross amount is the total value of the paycheck, while the net is the amount paid to you after deductions. Whether you get a physical check or set up direct deposit for teens to route it directly to your bank, most workers typically pay taxes as they go. You probably will, too, unless your job uses an uncommon pay structure. These deductions include:

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• Federal and state taxes

• Social Security

• Medicare

You can see the amount you've paid into each item on your pay stub, which your employer will either include on a paper check or make available in a portal or as a printed copy if you use direct deposit. It's important to keep track of these amounts when it's time to file your taxes.

Smart money allocation strategies for teens

When you get your first paycheck as a teenager, it's tempting to want to spend it all in one place. You can do that, but there are smarter ways to build your relationship with money. Learning how to save money as a teen helps build better money habits later in life.

The 50/30/20 rule: A simple way to budget

Many people use the 50/30/20 rule for budgeting. This strategy breaks your after-tax (net) income into three categories: 50% for needs, 30% for wants, and 20% for savings. You can use other percentages as well, depending on your unique situation. To find the right ratio for you, start with how much to save from your paycheck.

Creating spending categories: Needs vs. wants

It's easy enough to put aside money for savings, but how do you figure out exactly how much to put where? First, break down needs vs. wants. You may feel you need (rather than just want) to see a movie once a month for your mental health. But depending on your household, you may be expected to pay for your own gas or school supplies, which becomes a necessary expense. If that's the case, you'll need to create a budget based on needs vs. wants. Thinking critically about whether you truly need to spend money on something is a great start.

Building a savings plan: Key tips

Based on the 50/30/20 rule, you should aim to save 20% of each paycheck. But how do you manage your savings goals? Try breaking them down into short-term goals, long-term goals, and an emergency fund. (Yes, even as a teenager, starting an emergency fund is a good idea.)

Short-term financial goals are more urgent, so of the 20% you're saving, consider allocating 50% toward more immediate goals like getting a new car. Then, allocate 25% toward longer-term goals like a college savings fund and 25% toward an emergency fund. For example, if your paycheck is $1,000 and you save $200, you can put $100 toward short-term goals, $50 toward long-term goals, and $50 toward your emergency fund.

One way to manage this is by opening multiple savings accounts for each type of goal. Typically, it's free to open a savings account, and most will earn interest as you save. There are different types of accounts, and some, like high-yield savings accounts, have higher earning potential than others. You can set up automatic withdrawals to seamlessly streamline allocating money for each account.

Introduction to investing for teens

Another potentially effective way to compound your long-term savings efforts is by investing. Investing can be part of a larger, long-term savings strategy, as historical data suggests that the stock market generally increases over time. Some of the investment vehicles teens might consider:

• Retirement funds: It's never too early to start making retirement contributions to a 401(k) or Roth IRA. Not only can they reduce your taxable income, but over time, they can yield significant returns.

• Index funds: These funds invest in many stocks and bonds together rather than individual ones, reducing the risk of a single stock tanking your investments.

• Family money apps: Financial tools like Greenlight Infinity give you a safer, guided way to dip your toes into investing.

Budgeting tips for teen expenses: Tools and apps

Staying on track with a budget is challenging for most of us, but it's an extra learning curve for teens new to earning, saving, and budgeting. Building responsible money habits is especially important when you're about to go off to college and start living on your own. Some tips to help include:

• Use an app: A simple money and safety app like Greenlight can help you monitor your spending and learn real-time smart money management skills.

• Use a debit card: While credit cards can be useful tools to build credit, debit cards represent a finite amount of money and can be effective money management tools for budgeting, saving, and avoiding overspending.

• Create a budget: Keep track of what you spend your money on and use a few months of data to create a budget of fixed expenses (needs) and variable ones you can potentially reduce and put toward saving.

Start building smart financial habits today with Greenlight

That just-got-paid feeling is exciting, especially the first time. But it's also the ideal time to kickstart smart spending and saving habits that build long-term financial health. That starts with your first paycheck as a teenager. Use Greenlight to track your budget, set goals, and build smart financial habits today.