I’m sure we all remember that thrill of our first job. The feeling of independence, responsibility, and most importantly, our own money. Whether it was an hourly wage or a starting salary, having access to our own money is an important milestone. If your kids are about to receive their first paycheque, they are likely on top of the world. That is, until they see the deductions. Most kids assume they will receive their hourly wage multiplied by all the hours they’ve worked. When that first payday doesn’t add up, reality sets in. Welcome to adulthood.
Once your child starts working, you have a unique opportunity. You get the good fortune to explain to them what all those deductions mean. You also have a captive audience. This is your chance to guide your child down the path of building healthy financial habits. Habits that can pave the way to financial well-being for years to come.
Understanding that first paycheque
With all its abbreviated deductions, it can often feel like you need a master’s degree in finance to understand a paycheque. If you haven’t looked at your paycheque in a while, here is a quick and easy way to explain your child’s first paycheque.
First, break it down into its two main sections, income and deductions. Your first goal will be to explain the difference between gross and net pay. As a reminder, gross pay is the amount received before deductions. Net pay is what we receive after deductions.
No matter where you live in Canada, there are certain deductions you will find on your pay stub.
- CPP: The Canada Pension Plan provides qualified retirees with a monthly payment.
- EI: Employment Insurance provides temporary payments in the event of job loss.
- Federal Tax: Pays for the operation of the federal government, including national defence, public safety, and other federal services.
- Provincial/Territory Income Tax: Pays for healthcare, education, and infrastructure.
To help your child better understand, go through the payroll deductions with them using a calculator. Let them see what percent each payroll deduction was of the gross. This exercise can realign expectations so that they don’t assume their take-home pay will be the same as the gross amount.
Beyond the basics: What else gets deducted?
Those four deductions above are standard, but there may be others. Employers can include deductions for supplemental insurance, such as health, dental, life, or disability. Some employers also deduct funds for pension plans. Other employers deduct contributions to RRSPs. Many of these deductions are optional and require opting in. Some deductions, such as union dues, may be mandatory. Each deduction corresponds to specific services rendered by employers or the government, such as health coverage or retirement benefits.
Set up smart banking early
Many employers pay via direct deposit, so you should also focus on banking before your child has their first paycheque. Their bank account should be in their name. If they don’t have one, this is the time to open one. Remember to consider each bank’s and each account’s fees and benefits when deciding which is right. At a minimum, your child should have a checking and a savings account, and a debit card to access their money.
Build healthy money habits that last
Once paycheques are in hand, it is time to start building healthy money habits. That can be a challenge, since it’s hard for a child to think long-term. That is why they need your help to guide them.
Hopefully, your children are starting to learn about budgeting in school. If not, 50/30/20 is an easy savings plan they can follow. It recommends allocating 50% of our pay to needs, 30% to wants, and 20% to savings. Young people should consider decreasing the 50% and increasing the 20% since they likely have few needs to cover.
Saving early can help them build a habit that will help them reach their financial goals. That is even more important, since most employers no longer offer pension plans, so individuals must save for the future. Kids will likely have a hard time thinking about retirement when they get their first job. That is understandable. If we can encourage them to start saving a part of each of their paycheque, those savings will grow. It will be there when they need it to fund education, travel, and one day even retirement.
Why saving matters more than ever
According to the Government of Canada, almost half of Canadians say, “they’ve lost sleep because of financial worries.” Nearly 33% say, “they are short of money at the end of the month.” Many of those worries stem from feeling that money won’t stretch between pay periods. Building up our savings is the best way to ensure that we have a buffer. That buffer can help us avoid payday loans, which can often trap people in endless cycles of debt. While there are some better alternatives, like Earned Wage Access, these options still come with fees and increase stress.
Taxes and the perks!
Once your child is on the payroll, they also need to start filing their income taxes. While that might be a gruelling activity that many wish we could avoid, for our kids, it doesn’t need to be. Filing taxes will likely be straightforward and may include benefits such as a tax refund and credits.
Many young people may be eligible for the Goods and Services Tax (GST) or the Harmonized Sales Tax (HST) credit. Those are payments from the Canada Revenue Agency (CRA) to “low and modest” individuals to help lessen the impact of the GST or HST. Your child will automatically be considered for those and other provincial and/or territorial programs once they file their taxes.
Turn their paycheque into prosperity: Wrap up
Getting that first paycheque is a significant milestone, but your child will still need your guidance. While it is never fun to have money deducted from your pay, it is helpful to let them know what they can control. Encourage them to “pay themselves first” by saving a small amount from every paycheque. This small habit can be the difference between struggling financially and thriving. Their small savings today can be the start of lasting wealth tomorrow.
