How do I start saving while I'm in high school?

A lot of people get into financial trouble because they never learned how to save money and invest wisely. You're lucky because you're still young and in school, which is the best time to master money management skills. Developing good savings habits now will put you in shape to accomplish whatever you want after you finish your education; whether that's buying a house or traveling the world. With these money management skills established, you will have developed the discipline to save for a comfortable retirement.

Saving money can improve your life in the short term too. The best way to get what you want is to plan and save. This goes for big goals like a car or a college education, as well as for smaller goals like a new pair of jeans or the latest video game.

Saving money is a discipline, but it doesn't have to be a drag. In fact, it can be fun--or at least painless.

Set Savings Goals

So how do you start? First, set some savings goals. An obvious one is education after high school. If your parents say they'll pay for college, start a college spending fund. When you have cash for a late-night pizza or gas money for a trip home, you will be grateful you started saving early.

Not planning to go to college? Deciding against traditional routes of higher education doesn't mean you can't start saving now. You still may need some training to get a good job, and that will likely require money.

Think about short-term goals too. Things you really want or need that will require savings, such as prom tickets, a car, or a new cell phone.

Next figure out your income, which may come from allowance or from any other jobs outside of your home that you may have. A sure way to boost savings potential is to boost your earnings, and you don't have to work at McDonald's to make money. Consider going into business for yourself by mowing lawns, pet sitting, tutoring or doing chores at home.

How Much Will You Save?

Set a savings target--a percentage of your income that you'll save no matter what. Consider the Balanced Money Formula, which calls for adults to set aside up to 50% for needs, 30% for wants and at least 20% for savings. Since you're still living with your parents, most of your income should fall into the wants and savings categories. Aim for the highest savings percentage you can and decide how much of that percentage will go toward short-term and long-term goals.

Whenever you get money, pay yourself first by putting the designated percentage into savings right away--before temptation strikes. Then you can spend the rest of the money guilt-free.

The Power of Compound Interest

OK, you've saved some money. Now where should you put it? If you're saving for the short term--less than five years--your safest bet is a savings account, money market account, or certificate of deposit. When you invest your cash in interest-bearing vehicles like these, your money grows automatically. Not only that, you earn interest on the interest--a concept called compound interest.

Let's say, for example, you invest $100 in an account that earns 5% interest per year. By the end of the first year, you'll have $105. By the end of the second year, you'll have $110.25. In the second year, you will have earned another $5 on your original investment of $100, plus 25 cents of interest from the first year. A quarter may not sound like much, but compound interest adds up over time, and the beauty of it is you don't have to lift a finger to earn it. In 25 years you will have almost $340, even though you didn't add a penny to the original $100.

Interest rates vary according to the economy. They tend to be low during times of recession, and rise as the economy improves. So, if interest rates seem low, don't get discouraged because rates will go up eventually.

Long-Term Investment Options

Long-term investment options include stocks, bonds and mutual funds.

  • Stocks: When you buy stocks, you buy shares of a company. This can be thought of as buying a small piece of ownership in a company, and you are purchasing a claim on their earnings
  • Bonds: Loans to companies or government agencies. When you buy a bond, you're actually loaning money. Bonds work by paying your original loan back plus interest. The type of bond purchased determines when and how the loan and interest are repaid
  • Mutual fund: A pool of stocks and bonds run by finance professionals. You buy shares of the mutual fund, which goes up and down as the values of the stocks and bonds rise and fall.

It isn't too soon to learn about long-term savings. To see how your money can multiply consider this, courtesy of the Alliance for Investor Education savings calculator: If you're 16 and put away $75, instead of buying that new pair of sneakers, you'll have $550 in 25 years and $3,731 by the time you retire (assuming an average 8% annual return).

These long-term investments have the potential for higher returns than a savings account, money market account, or CD. The higher returns do come with risk, and you could lose some or all of your money. Among these long-term investment options, stocks can produce the highest rates of return but they also have the most risk.

Savings Accounts, Money Market Accounts and CDs

Among short-term investment options, savings accounts provide the greatest flexibility. You can open a savings account at a bank, credit union or savings and loan with almost any amount and you can get access to your money whenever you'd like.

Money market accounts are high-yield savings accounts, which mean they earn a higher rate of interest than typical savings accounts. However, they often require a minimum amount to open the account and limit the number of transactions you can make.

Certificates of deposit are time bonds. You agree to deposit a certain amount of money for a certain amount of time, and once the CD matures you collect the money plus interest. CDs offer higher interest rates than savings or money market accounts, and they come with lots of options. You can get them for terms varying from one month to several years. The downside is once you've put your money into a CD, you can't get it back before the CD matures (reaches the end of its term) without paying a penalty. Make sure you understand the term and all the features of a CD before you invest.

Get Best Interest Rates On Savings

Just like you shop for the best prices on stuff you buy, shop around to get the best interest rates on savings and money market accounts and the best CD rates. Check local advertisements in your area and sit down with your mom or dad to look for online CD rates and the best online banks.

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

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

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