How do I start developing savings habits before high school?

Although it was more than 200 years ago when Benjamin Franklin said, "A penny saved is a penny earned," the words still ring true today.

Saving and planning create the path to get you what you really want and need in life. Saving money isn't so much about giving up things as it is about giving to yourself--your future self.
So how do you start?

Savings Goals: What Do You Need?

The first step is to set some goals. What do you want and need to buy in several years? College may seem eons away, but it's not too soon to start saving--even if your parents say they'll pay for your education. Count yourself lucky if that's the case, and start saving now so you'll have spending money in college. Another long-term goal might be a car or a trip.

Set some smaller short-term goals, too. What do you really want or need in the next year? Maybe you have your eye on a new cell phone or you want to add to your wardrobe.

Next, figure out your income. Add up how much money you get from allowance, gifts and doing chores around the house each month. A great way to save more money is to increase your income so you have a bigger pot from which to save. Just because you're too young to work at McDonald's doesn't mean you can't get a job. Consider babysitting, mowing lawns, walking dogs, pet sitting or other odd jobs. Use your imagination.

Savings Targets

Decide how much of your income you want to set aside for long-term savings. A starting goal might be 25%--$1 for every $4 you get. You might also set aside an additional amount, perhaps another 25% for a short-term savings goal. Put the cash for savings aside as soon you as get any money. Then you can spend the rest as you wish.

You don't have to give up good times to save. Small change can add up to big savings as well. Say you normally spend $10 a week on candy bars and sodas. If you spent just $7.50 a week instead, you could save $130 a year.

Here are some other ways to cut costs:

  • Rent a video, or even better, check out a video from the library and invite friends over instead of going to a theater
  • Buy used versus new. For example, shopping thrift stores is fun, and you can get killer bargains on everything from board games to gently-used designer jeans
  • Keep track of everything you spend
  • Avoid buying snacks at convenience stores, which usually have higher prices than grocery stores
  • Take your lunch to school instead of buying it

Interest: The Magic Ingredient

So what do you do with your savings? You can store pocket change in a piggy bank, but you'll need a real bank account to get serious about saving. A bank account will keep your savings safe and let you earn compound interest--the magic ingredient of any savings plan.
Interest is a payment banks make to you for letting them hold onto your money. The cool part? You earn interest on the money you deposit and you can earn interest on the interest--a concept called compound interest.

Consider this example from the Federal Deposit Insurance Corp. Say you deposit $50 in an account that pays 3.5% interest compounded monthly. The first month, you'll earn interest on your $50. The next month, you'll earn interest on your $50 plus the interest you earned the first month. Your savings will grow, even if you don't put in any more money, but it will really take off if you keep contributing. If you put $50 every month into a savings account with a 3.5% compounded monthly interest rate, you could have $3,333 in five years!

Savings Accounts, Money Market Accounts, and CDs

Banks offer a variety of ways for you to save money. Most banks will let young people open a free savings account with a small amount of money. Savings accounts let you deposit or withdraw money whenever you'd like. But the interest on savings accounts is low.

Money market accounts pay higher interest rates than regular savings accounts--meaning you could earn more money on your savings. The downside of money market accounts is they usually require a fairly large deposit, and often there's a limit on how many times you can withdraw money each year from the account.

Certificates of deposit, or CDs, have higher interest rates than savings or money market accounts. When you invest in a CD, you make an agreement to deposit a certain amount of money in the bank, say $1,000, for a certain amount of time, perhaps one year. At the end of the agreed amount of time, you get your money plus interest. It's a great way to add muscle to your savings. A wide variety of CDs are available with terms ranging from one month to several years.

The downside? Once you put your money in a CD, you can't take it out until the CD has matured (reached the end of its term). If you do take money out, you'll pay a penalty that will wipe out interest you would have earned.

CDs also require a large deposit, so you may need a hefty money gift from a relative to get a CD. Keep in mind that interest rates are higher for larger amounts of money invested for longer periods of time.

Get Best Savings Interest Rates

Banks offer different interest rates on savings. When you're ready to invest in a CD, or open a savings or money market account, shop around at the local banks in town and online (with your parents) to find the best banks and the highest interest rates.

Long Term Investment Options

Someday you might want to invest money in stocks, bonds, or mutual funds. You can earn more money from these investments than you can with CDs, savings accounts, and money market accounts. But the potential to earn more money also comes with the risk of losing money. Due to the risk associated with these types of investments, they are better for long-term savings.

Some examples of long term investments are:

  • Stocks: Tiny shares of companies that you can purchase and then, if you're fortunate, sell at a profit
  • Mutual funds: Groups of stocks and bonds managed by financial professionals. You buy shares of the mutual fund, which go up and down as the value of the stocks and bonds rise and fall
  • Bonds: A loan you make to companies or government agencies, which repay your money, plus interest at a certain date in the future
  • U.S. Savings Bonds: An easy, and the safest investment in this group, because they're backed by the federal government. You can buy paper bonds from banks, starting at $50, and purchase bonds electronically from the US Treasury for as little as $25

Planning is the key to saving and meeting both your short-term and long-term goals. There are a variety of ways to save, and there are many valuable tools to get the most out of your savings. Whether your goal is to put away money for college, or to purchase a new cell phone it isn't too early to begin saving.

This Guide to Money answer includes the topics: Save, How to save.

Barbara Marquand is a freelance writer who writes frequently about personal finance.

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