I am sitting here getting ready to write this article and my attention is grabbed by the TV. Another commercial. What are they selling now? Clothes, video games, gaming stations, coffee, movies and the list could go on and on.
Marketers know that you are a valuable market, you are earning money and/or influencing your parent’s choice of items to spend their money on. For me, it is more important to look at what is not being talked about. Not on TV or on the internet. That subject is saving money, how to do it, why to do it, and when to start doing it.
Let’s start at the beginning.
What is savings?
The definition of Savings according to Merriam-Webster dictionary is “an amount of something that is not spent or used.” Another way to think about this is the money you have left over from your pay check that you are not going to spend. Do you have money left over?
Why save money?
There are many reasons to save money. You want to be financially independent, move out of your parents’ house, buy a car, or your car might need to be repaired. You can even think further out into the future at what your goals might look like: buying a house, college, marriage, and travel.
Where do I put my savings?
I’ve heard stories from my parents about keeping money in a jar at home or under a mattress. I don’t recommend these ideas because you miss out on the compounding of interest. Your local banks have accounts for the purpose of saving money. You want to do a little research and talk with your parents. Most banks have accounts for kids or students that offer interest and no fees. To help your account grow, it is important to find an account that will not charge you monthly fees. The customer service representative at the bank can give you all the information you need to help choose an account that best serves your needs.
What is compounding interest?
Albert Einstein called compound interest, “The eighth wonder of the world.” He said, “He who understands it, earns it…he who doesn’t…pays it.”
From Investopedia.com, compound interest, or compounding interest, is interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan.
For example, you start your account with $25. At the end of the month your account earns 1.20% interest ($.30) at the end of the month your account is worth $25.30. Next month your account earns interest on the $25.30 and adds another $.30 for a total of $25.60. After 12 months your initial deposit of $25 grew to $28.84.
What happens if I save regularly?
When you start to save early your account can really grow. Don’t let that sentence discourage you if you haven’t started sooner. Starting to save money at any age is beneficial.
Taking the example above and changing it so you add $25 a month to your account. A monthly deposit of $25 and interest (1.20%) becomes approximately $324 in 12 months. How about 5 years? $1,571. How about 10 years? $3,213.
Wow, that’s a lot of money to save for only $25 a month! If you feel you don’t have that much money left over at the end of the month, perhaps you can break it down into smaller pieces. It would be about $5.75 a week.
Do you have one item a week that you don’t need to purchase? Some examples I found: Two Dunkin Donuts or Starbucks large coffees are about $5. A McDonald’s Big Mac meal is about $6.
As you get more skilled at identifying a want from a need item, the opportunities for savings will be endless.
Every day you make choices about how to spend your money and whether or not to spend it. I hope the above information helps you make an informed decision to save some of that pay check each week.
Your future self will thank you!
About the Author: Heather BROCK-HEARN is one of Your Monthly Mentors, a Teen Money Coach who works with teens, young adults, and parents to help them become the masters of their financial destinies. With more than twelve years as a finance leader with the largest non-profit yoga retreat center in the US under her belt, her knowledge of finance is diverse and extensive. Read More…