Talking to Young Adults about Money
and Their First Salary
See also: Top Tips for Saving Money
When your young adult children start work, they suddenly encounter a whole host of issues that they had never previously considered. They have to read and understand an employment contract. They have to decide about their pension, including whether to opt in or out, and their desired pension contributions. When they receive their first payslip, they may find they have other questions too, such as about their tax status, or other deductions from salary.
For many young adults, their first port of call with these questions is their parents. This page explains more about how you can answer their questions, and help them to find out more. It also explains why you really need to get comfortable talking about money to your young adult children—and what subjects to discuss to help them to avoid common financial errors.
Talking About Money
It is essential to be comfortable talking about money (see box).
The Importance of Talking About Money
Research in the UK back in 2020 found that over half of us (52%) feel uncomfortable talking about money, even when we are worrying about our financial situation.
This is a problem, because if money is a taboo subject in your house, your young adult may not feel comfortable bringing their questions to you—and how are they going to know where to find reliable information?
It is therefore a good idea to talk about money regularly, and long before your child is earning their own salary. Our page on Talking About Money explains more about this, and why it is important. It also provides some ideas for how to start conversations.
Without this level of comfort, you will be unable to have sensible conversations with your young adult children about money. This could mean that they make all kinds of mistakes about money—and you won’t know to help them.
There are two possible scenarios that you may encounter when your young adult children get their first paid job:
They come to you with questions about their employment and salary; and
They don’t ask you anything.
It is worth considering the two scenarios separately, because they require quite different approaches.
Answering Questions
The first scenario is probably easier to manage.
Your child has opened the conversation by asking you about their employment contract, financial situation and/or something on their payslip. You can therefore reply, and then discuss other issues that might be unclear.
Likely questions about their first salary include:
Should I opt into/out of my employer’s pension scheme?
What proportion of my salary should I put into my pension?
Why do I need a pension now? I won’t be retiring for years yet.
What does my tax code mean on my payslip?
How do I work out what tax I’m paying and whether it is correct?
On pensions, the advice is generally to opt in or stay opted into employers’ pension schemes, especially if this is your first job. It is also a good idea to pay the maximum proportion that you can.
The reason for this is that employers will also contribute. This is effectively ‘free money’—and not available in any other way. The second reason is that pensions are very tax-efficient, because your contribution is taken out of pre-tax income. This means that you don’t pay tax on it. It is also a good idea to get into good habits early. If you put money aside from your earned income from your first payslip, you will never miss that money.
Finally, the big question your young adult may be asking: why do I need a pension? The answer is that it is always a good idea to start saving early for retirement because you never know how your situation might change in later years. Money saved now will be invested, and hopefully growing in value.
Our page on Planning for Retirement explains more about this.
What about tax questions? The answer to these is to look them up via your government’s websites.
The most important issue about tax codes is not to be on an emergency code, because that usually means that there will be a LOT of tax taken out of salary. However, your young person should also check that they are paying approximately the right amount. There are tax calculators available online that they can use for this.
TOP TIP! Keep talking
If your adult child has opened the conversation, you can keep it going—both now and later.
For example, if they ask you about their pension contributions or tax, you can ask them the next month if they got it sorted, and if their next payslip looks right.
As always, keep the communication channels open, and then you can provide advice if needed.
Opening the Conversation
If your young adult child does not raise any questions about money, you have two choices. You can either hope that they are financially literate—or open a conversation.
It generally seems wiser to open a conversation.
Just ask them if everything was OK with their first payslip, and if everything was clear. You can also ask about their employer’s pension scheme, and its level of generosity. If you are open and unembarrassed about asking them, they will probably be prepared to share information freely in return. There isn’t really much you can do if they aren’t prepared to talk—but at least you have tried.
The key is to make sure that they know that they can ask you questions, or that they have another source of reliable information. This might be a financial adviser, or perhaps a website like MoneySavingExpert.com or the Money Management and Financial Skills pages on SkillsYouNeed.
Other Financial Issues to Mention—and Mistakes to Help Them Avoid
There are also a few other financial issues that it may be worth discussing—if only to help your young adult to avoid some obvious mistakes.
‘Money burning a hole in their pocket’
When your adult child receives their first payslip, it is likely to be the biggest sum of money that they have ever received in one go. It is going to be hard for them to understand that they don’t actually have unlimited funds at their disposal.
It is, however, important that they do so, to avoid running out of money quite quickly.
Small spends will rapidly add up to much larger ones.
That few pounds for a coffee each morning is more than £15 per week, and that means more than £60 per month. Add in a pastry every other day, and it could easily rise to £100 or £200 per month without even trying, especially if they also buy lunch each day. Your young person would probably think twice about paying £100 for a single item, but could easily happily be buying that coffee and pastry each day.
This is particularly important if they don’t immediately start paying tax on their income, for example because they will not reach the basic income tax threshold within the tax year. This means that their disposable income will actually go down after a few months.
You might approach this by encouraging them to save money each month before spending anything and help them to draw up a budget to appreciate the size of their discretionary spending fund.
The problem of repeated spending
A second problem is the issue of subscriptions and other spending that requires repeated payments.
It is very easy to get sucked into subscriptions to things that you might use a few times, and then not again. Whether that is a streaming service to watch a particular series, or a gym that they don’t really have time to use, there are many possible temptations.
Over time, this can mean that your young person is spending a lot of money on things that they no longer use.
Encourage them to develop a habit of reviewing their bank account regularly, to check the direct debits and standing orders.
They should consider cancelling any if they haven’t used the service or facility in the previous month.
The importance of a contingency fund
Encourage your young adult child to build up a contingency fund by regular saving.
Experts advise having three to six months’ worth of your salary set aside. This should be easily accessible, for example, in a savings account, rather than in investments. This will be enough to tide you over if you lose your job, and will also enable you to pay for any unforeseen expenses like a car breaking down.
You might also remind your young adult that when they have spent any of their contingency fund, they need to focus on topping it back up again before they embark on more discretionary spending.
Understanding borrowing
It is important that your young adult child understands when and how they might use borrowing to fund a purchase—and when it is best avoided.
It is fine to use borrowing to purchase something that will appreciate in value. For example, a house or flat is unlikely to go down in value (although it can happen). You can therefore sell it for more than you paid, and fund the cost of the borrowing. We therefore reasonably take out a mortgage to buy one.
It is not a good idea to borrow to pay for either a depreciating asset like a car, or a lifestyle item like a holiday. You will end up paying far more for the item than it is worth. It is better to either buy something cheaper, save up until you can afford it, or simply go without.
Our page on Loans and Savings explains more about different types of borrowing, and how to decide. This may be a helpful starting point for a conversation.
Lifestyle inflation
Lifestyle inflation is where your expenses increase alongside your income.
It is not a wholly unreasonable or unrealistic thing to happen. However, it has an important implication. Having more money means that technically you can save more each month, rather than spending it. It is less fun—but it does mean that you are building up a cushion for the future. This might be important if you want to retrain, or change jobs to a lower paid field, or even just take some unpaid leave to travel.
Some lifestyle inflation is fine—but not using your whole salary. Encourage habits of saving in your young adult children.
A Final Thought
Ultimately, of course, what your young adult child does with their money once they start earning is up to them.
However, it is still important to talk to them about money, and make sure that they understand the implications of their decisions.