According to our latest Youth Economy Report, children in the US saved over $2.8 billion in 2020. That’s about 10% of their total income. It’s pretty impressive when you consider that, according to Bankrate data from January 2022, many adult Americans have no savings at all. And 56% don’t have enough saved to cover an unexpected $1,000 bill.
But is saving 10% of their earnings enough? Or should kids be setting aside more? And how much should teenagers really have saved by the time they turn 18?
How much should teenagers save?
Adults are advised to save 20% of their income. The general rule of thumb is 50/30/20. That’s 50% for needs; 30% for wants and 20% for savings.
Experts also recommend having at least 3-6 months’ worth of living expenses saved in case of emergency. (8-12 months is preferable.)
But what about teenagers? How much should they save?
Teens should save 20% and have an emergency fund
Ideally, teenagers, like adults, should be saving 20% of their income, whether that’s earned or an allowance, or a combination of both.
High schoolers should also have an emergency fund. How much of a fund depends on their age.
A 17-year-old whose expenses are maintaining a car and a social life, won’t need the same amount to fall back on as a married couple with kids, for example. Three months’ worth of what it takes to operate the car—gas, maintenance, and insurance —should cover their financial needs.
Sure, they’ll still live at home, so any real emergencies, like health scares, will be covered. But we’re talking teen-type emergencies here. Like not being able to text or getting a flat tire.
Being financially responsible for their possessions encourages teenagers to take care of them. What’s more, knowing they can replace a cracked cell phone or buy a new tire builds confidence. They know they can handle an emergency if there is one.
Setting savings goals
So that’s the ideal: an emergency fund covering a teenager’s financial needs and saving 20% of earnings. But how much a teenager can really save varies. It’s determined by:
- What their expenses are
- What they’re saving for
- How much money do they earn.
Teenagers generally have more outgoings than 6-12-year-olds. From 13-18, their expenses begin to look more like adult ones. They start going out with friends and on dates, buying gas, and paying cell phone bills.
Then there’s the question of what they’re saving for. Unless they’re thinking long-term and putting money aside to buy an apartment, the two biggest expenses American teens face are paying for college and buying a car.
Whatever the savings goal, setting a target and deadline are vital to monitor progress. But as teens typically work part-time, the amount of money coming in each month can fluctuate. It’s likely to be more during the summer vacation and less during term time.
Saving a percentage not a dollar amount
Saving a set dollar amount of say $50 every month to reach a savings goal sounds like a great idea in theory. In practice, it could prove disheartening. It may be difficult for a teenager to achieve that when they’re fitting a part-time job around their studies or sports activities.
Putting aside a set percentage of their paycheck instead of a dollar amount, means they’re saving regardless of how many hours they’re working. Clocking up more hours means they save more. Working fewer hours, they’ll save less.
The key to saving is consistency. And by getting used to saving the same percentage of whatever they’re earning, teens will be learning money management skills that’ll set them up for life.
How much money should a teen aim to have by 18?
As a guide, by 18, a teen should aim to have a few thousand dollars in savings. Ideally, around $10,000. But again, the exact amount will vary.
Some teenagers will have graduated high school by 18. Others may still be living at home with a year to go before school’s out forever. Some may be going straight into a job. Others may be going traveling or heading to college.
A teenager planning on living at home and going to college nearby will need less money set aside than her friend who’s going to college in another state and renting an apartment off-campus with roommates.
How much money a teenager should have saved by the age of 18 depends on:
- Their current situation
- What their next move is
- What their future financial responsibilities are.
Reasons to save money as a teenager
Saving isn’t always easy or fun. But knowing how to save, cover emergencies, set goals and priorities, delay gratification, and prepare for long-term investing are invaluable skills for teens to learn before leaving home.
Here’s a quick rundown of reasons teenagers should save:
- Master a key financial skill early
- Build self-reliance and independence
- Learn delayed gratification
- Maximize the power of compound interest
- Building an emergency fund
- Saving for college
- Moving out and paying rent
- Master a key financial skill early
Saving is a fundamental financial skill. Learning how to save as a child helps develop financial healthy habits that’ll set them up for adulthood. They’re more likely to make strong decisions about spending and less likely to fall into debt.
- Build self-reliance and independence
Setting a savings goal, working hard to achieve it then actually buying the item creates a sense of accomplishment. Over time, it builds independence as children learn they can rely on themselves to fund their wants.
- Learn delayed gratification
When your kids save up for something they want over a long period and pay cash for it, they’re learning delayed gratification. Saving for big purchases, like a car, or for college, teaches patience and goal setting. And having taken all that time to save the money, they’ll make wiser spending decisions.
- Maximize the power of compound interest
To maximize the power of compound interest, the sooner kids start saving the better. In simple terms, compound interest is when you earn interest both on the money you’ve saved and on the interest you earn.
Say you saved up $10,000 by the age of 18. You invest it into a mutual fund and don’t touch it till you’re 65. Assuming a rate of 7% compounded, you’ll have around $240,000 by the time you retire.
To show your children how much you can earn by starting to save young, try using a compound interest calculator.
- Building an emergency fund
Having money set aside for a rainy day gives a feeling of confidence and independence. You know an emergency won’t put you into financial freefall. If something happens you can cover it.
- Saving for college
The average federal student loan debt balance is $37,787. Private loans are higher – around $40,000. Saving for college as a teen (even if you’re lucky enough to have parents contributing to tuition fees) makes financial sense. There’ll be less to pay back when they graduate. And leave them more to spend in their twenties, when they’ll have much bigger outgoings.
- Moving out and paying rent
Whatever your teens can save toward a deposit and rent is going to help when it comes to leaving home. It’s not just a month’s deposit and another month’s rent upfront they’ll need either. There’ll be moving costs, furniture, and appliances to budget for too.
How to encourage your teen to save
Learning to save and spend wisely as a teen will set them up for a life as a financially responsible adult. But as most teenagers aren’t worried about saving money, here’s a list of ways you can encourage them:
- Have conversations about future money responsibilities
- Provide a place to save
- Set savings goals
- Help them track spending
- Discuss needs vs wants
- Set a good example.
Help your teen set savings goals with GoHenry
A GoHenry prepaid debit card is a great way to encourage healthy spending and saving habits. Teens with jobs can get their paychecks straight to their GoHenry account, set savings goals in the app, and track their spending too.
As well as giving teens a feeling of financial independence, parents get peace of
mind. Pay in an allowance, set spending limits, and get notified whenever your kids make a purchase. You can block a card and replace it fast if it gets lost or stolen too, all via the app.
What’s more, our in-app Money Missions tool makes learning money management skills fun. Level 2 has been created for ages 12-14. And missions designed to challenge 15-18-year-olds are coming soon.
