Saving Money for Youth

Plan with a Purpose

People save money for many different purposes, including big-ticket purchases like cars, homes, educational costs, retirement, and emergencies. Even if you’re not paying for these items outright—few people do—loans typically require a down payment, which is an initial payment that brings down the overall amount borrowed. You’ll need cash for that.

Think through large purchases you’d like to make in the next one, five, and 10 years. Maybe you want to put money towards your first car in the next few years. How much is the car you want? Are you paying for it outright or simply trying to save as much as you can? Figure out a ballpark cost, then look at your timeline. How much do you need to save toward that goal to make it happen? For instance, say you’re hoping to spend no more than $5,000 and you turn 16 in two years. If you save around $210 a month, you’ll hit your target.

Some people prefer to save smaller amounts towards many goals. Others focus on one savings goal at a time. The choice is yours.

Savings Preferences

The decision of what to save for and how much to save is personal. It depends on your preferences and circumstances, and is rarely the same for everyone.

Saving requires discipline, but there are some personality types that have an easier time saving or following a plan. Try strategies that work with your personality. Maybe you need an accountability partner—a friend who wants to save money too and you can check in with as you make progress toward your goals.

If you have regular income coming in from a job, set up automatic transfers to a savings account from your checking account.

No matter your savings goal—and even if you don’t have one—now is the time to learn how to save money and live on less than you earn. If you can enter adulthood with established savings habits in place, you’ll be ahead of the curve. A savings account is a safety net for dealing with car or home repairs, job loss, or other emergencies.

Account Options

When you store your savings in a financial institution, you’re paid interest on your deposits. Those who borrow money from financial institutions pay interest on their loans. Typically, loan interest rates are higher than savings interest rates.

Savings products vary by financial institution, and so do interest rates. Accounts with higher deposit requirements usually pay higher interest. When selecting a savings account, keep in mind how often you’ll need to access your savings, and how frequently you’ll make deposits.

The Power of Interest

Money in savings accounts earns interest, which is money the bank pays you on your deposits. To calculate the interest earned on savings accounts, multiply the interest rate by the balance in the account. Say you have $500 in a savings account earning 0.5% interest. In one year, you’ll earn $25. That earned interest is added to the original amount—called the principal—and then you’ll earn interest on that, too. So now you’re earning on $525, which takes next year’s interest to $26.25. This is called compound interest. Think of it as interest earned on interest. Check how often interest on your account is compounded—it could be daily, monthly, quarterly, or annually.

When working with compound interest, use the Rule of 72 to compare how different interest rates grow over time. The Rule of 72 helps you estimate how long it will take for an investment to double at a specific interest rate. To calculate, take 72 and divide it by the interest rate. For instance, if your interest rate is 6%, it will take an estimated 12 years to double your principal.

Savings Safeguards

Money in checking and savings accounts at financial institutions are safe. This is because it is protected by the federal government up to certain limits. For instance, the Federal Deposit Insurance Corporation (FDIC) protects up to $250,000 per depositor and ownership category. The National Credit Union Administration (NCUA) also grants credit union members at least $250,000 in total coverage.

Coverage typically extends to checking accounts, savings accounts, money market accounts, and certificates of deposit. Deposit insurance does not extend to stock or bond investments, mutual funds, crypto assets, life insurance policies, annuities, and securities. Coverage also does not extend to U.S. Treasury bills, bonds, or notes, but those are already backed by the full faith and credit of the U.S. government. Basically, if you put your money into something more risky, like an investment, your money is probably not protected.

Getting a handle on your savings goals, strategies, and savings account options can set you up for long-term financial success.