How to Budget and Save Money When You’re a Teen

At some point after getting that first job, most teenagers discover that they want to start saving money for a car or college. Reaching that goal means making up a budget and then setting aside a certain amount of money each month to go into a savings account.

How is this done?

With my kids were teens, we always worked backwards by starting with the goal first. If the goal, for example, is to save up $5000 for college, and your teen is 16 now, this means that he must save $2500 a year for the next two years.

Using this example, saving $5000 in two years can be done in an assortment of ways, all depending on how your teenager earns his money. Teens with a weekend job should be able to put $100 a month in the bank during the school year and $525 a month in the bank during summer break. Teens who work full time during the summer will have to put $800 a month in the bank to reach their financial goal. Teens who receive cash gifts for birthdays and holidays might be able to get by with working less.

For many teenagers, this is a reachable goal as long as they manage their expenses. This is called budgeting and it means figuring out what monthly expenses must be paid before money can be put in a savings account.

Monthly expenses can be broken down into two separate categories, called Needs and Wants. Needs are the things a teen must pay for such as bus fare to his job, clothes, or other costs that parents expect their teenagers to pay. Wants are the fun things, the extras things that really aren’t necessary but are nice to have or do. This can include things like CDs, going out to the movies or having a weekly Starbucks.

Once the monthly expenses have been identified, the next step to add up these expenses and subtract this number from the total. This helps to determine if a monthly or annual savings goal is still achievable. If not, it means taking a hard look at the expenses and looking at ways to trim costs. Is it possible for your teen to ride a bike to work instead of the bus? Can he pack a sack lunch from home instead of eating fast food? Can he get by with buying less music or forgoing the weekly Starbucks? Where ever costs can be trimmed, this will lower those monthly expenses and allow more of your teenager’s paycheck to go into a savings account.

In some cases, it might not be possible to reach a financial goal with the current income and expenses situation. If this is the case, your teen may have to either find another job that pays a little better or a second part time job around the neighborhood that fits into his schedule. One of the highest paying neighborhood jobs a teen can do is mowing lawns which can pay anywhere between $10-35 a hour.

The final step in determining where and how the money is to be saved. Most banks offer free savings accounts for kids and teenagers which pay a tiny bit of interest, usually less than 1/2 of a percent. For a higher interest yields, my kids used to invest their savings in short term Certificates of Deposits, also known as CDs. We found a local bank that issued CDs for as little as $500 that paid between 2-3% interest depending on the term. By putting their money into these CDs, they earned almost $60 just in interest.

Saving for college or a car means starting early, figuring out a realistic plan for earning money, and setting it aside relentlessly. This is easy to do when your teenager has determined a budget for himself and sticks with it.