Sometimes, teens get in trouble, in many cases, that trouble is taken care of in a manner that’s quiet and relatively simple and that is the reason why an emergency fund is needed.

In other cases, the trouble a teen causes will interact with the adult world. Teens can be involved in legal issues that require them to be bailed out – and that job falls to the parents.

It’s important to stop and ask yourself if you can afford to pay when and if your teen gets in trouble. Answering this question has caused many parents to consider creating an emergency or a bail fund for their teenage children. Whether this is right for you is a matter of how you look at the fund.

• Should I Keep an Emergency Fund for my Teen?
• What are Some Money Lessons from Teens?
• How can Teens Save Money?
• What is the Best Investment for Emergency Funds?
• Is 1000 Enough for Emergency Fund?
• How do you Build an Emergency Fund?
• Why Emergency Funds are a bad Idea?

Should I Keep an Emergency Fund for my Teen?

Emergencies come in all shapes and sizes – from busted alternators to air conditioners, from orthodontics to arrests. The frequency and variety of emergencies tend to increase when adolescent brains begin learning how to make decisions.

Read Also: How to Build an Emergency Fund

Some choose to learn the hard way. Adequate savings will protect you from the financial impact of poor teenage decisions, and more importantly will serve as a tool to help teach teenagers better decision-making skills.

Here are some cases where an emergency fund will surely come in handy.

The Possibility of Trouble

Creating a bail fund for a teenager doesn’t mean that you think your teen is a troubled child or that he or she will necessarily get in trouble with the law.

These funds are, however, an admission that you won’t always have the money on hand to deal with the problems that might occur in a teen’s life.

Having money put away to pay bail is a good way to make sure that you can help your teen avoid spending the night in jail and it’s also a good way to make sure that you’re prepared for any kind of monetary emergency that he or she might face.

More Than Bail

Of course, a bail fund can be for far more than just bail. If your child has trouble with the law, it’s possible that you might need that money to get some kind of legal representation.

It’s also significantly easier to expunge your record when you are a minor, so having the money available to do so might be a good idea. Keeping this general fund available for your teenager isn’t a knock against his or her trustworthiness, but rather an admission that bad things can happen to him or her.

A Lifelong Skill

It is vital to save an emergency fund to protect your finances against adolescent misbehavior, but don’t forget the importance of passing this lesson on to your teen, as well.

More is caught than taught when dealing with kids, so if you’re developing responsible financial habits, you’ve already given your teen a strong example they can emulate. Encourage teens to save a little and give a little, and not spend every dime they earn.

Help them make savings a part of the rhythm of their life. If you can ingrain these habits early, they will become a pattern that will serve your teen well throughout a lifetime of decision-making.

What are Some Money Lessons from Teens?

Teenagers can understand finances better than many parents think.

Here is what they thought were especially important points and are excellent lessons for young and old alike.

Stuff happens–get an emergency fund

One teenager stressed that having an emergency fund is one of the most important savings buckets for anyone. As he says, stuff just happens, and he even provided an example.

After he accidentally broke his aunt’s MP3 player when he secretly took it to school to show his friends, he felt much better when he apologized because he had the ability to present a solution to the problem. He could afford to purchase a replacement. The lesson:

Everyone needs an emergency fund to weather unexpected storms. The general rule of thumb is a minimum of three months of your household expenses, although many people feel much more comfortable being able to cover 6 to 12 months of expenses in case of an emergency.

Don’t stash cash in your mattress or desk drawer

The other son felt it was important for children to understand that it is better to save money in a bank or to invest it rather than keeping it in the house. Money in a savings account or an investment account generates income while money at home doesn’t, and it can easily be lost or stolen.

With interest rates as low as they are today, earnings are extremely minimal, but the concept will serve them well in the future. The lesson–let your money work for you.

High-yield savings accounts, U.S. savings bonds, or investments in the market are all viable options but money needed for emergencies or other short-term goals should be kept in safe investments so the value does not fluctuate. Money that won’t be needed for many years can be invested for the long term in riskier equity funds.

Start saving for retirement early

Interestingly the recent global financial turmoil made an impression on my children although our family hasn’t suffered the same way many others have in the last few years.

Both children felt it was important to save money for retirement starting early in life because of the uncertainty surrounding pensions and Social Security. To be honest, this discussion point caught me off guard because pensions and Social Security have not yet been a topic of conversation, but this actually demonstrates the value of making finances a normal part of routine family discussions.

With the financial knowledge base we have worked to build over several years, they were able to listen to and comprehend fairly complex financial topics on their own. The lesson–a strong financial understanding empowers people to face the future.

For long-term retirement investing, utilizing a Roth, traditional IRA or the 401(k) plan available through your employer is the best place to start. Depending on income levels, marital status, age and retirement account type investors can set aside between $5,000 and $22,000 per year.

For those who enjoy planning for a strong financial future, talking with friends and relatives who do not have the same interest can be incredibly frustrating.

Whether these are children overspending as they enter the adult years, a spouse with no interest in the family financial plan, a sibling or even a friend, finances can strain the relationship.

Unfortunately many people develop an interest in financial planning on their own timeline, which often comes only when they face large debts, looming college expenses, imminent retirement or a crisis like the loss of a spouse.

Financial discussions and life lessons beginning when children are young is one of the best ways to help prepare them to avoid a financial crisis of their own in the future.

How can Teens Save Money?

Whether it’s a new iPhone, that trip you’ve had your heart set on, or bigger goals like buying your first car, you have big dreams as a teenager. Your parents might help you get some of these things along the way, but saving your own money towards these goals makes achieving them more rewarding.

Here’s how teens can save:

1. Start a savings account

As young YouTube enthusiasts like Emily Wass will tell you, you might feel conflicted or unmotivated to put money in your savings account if you’re not making much. But no matter if it’s $10 or $100, it can help.

Whether it’s for each day, week, or month, set saving targets and stick to them. A savings calculator will give you an indication of how long it will take to reach your goal.

Once you’ve established targets, put the money you plan to save for that period in an account. This will help reduce any temptation to spend. If you’re working part-time at your local supermarket or merely getting an allowance, put some of it aside.

Contributing to your account on a regular basis and following your targets establishes sound financial management and encourages better spending habits.

2. Separate spending money from savings

Though you’ve stashed the money you’ve made in a savings account, you might be tempted into thinking you should spend that money if you’ve run out of cash right? No—don’t touch it!

Your savings are for essentials and emergencies, not for more straightforward purchases like food and so on.

The smart thing to do is to have a checking (or “transaction account”) and a direct deposit account which you can access on demand. You can always start a student checking account and put some of your money in it in case you don’t want to keep too much cash on you.

This way, your goals won’t be conflicted. Savings accounts are created for the long haul while checking accounts deal with your everyday needs. Always keep that in mind.

3. Keep track of your purchases

You can save money easier if you keep a book of your purchases. That way you have a record of your spending so you know whether you’ve been spending more than you should be. Keep all your receipts and write down your spending totals.

Always date your entries and divide your money into categories, i.e., your income and expenses. If there’s cash that you can’t track for one reason or another, make a note of it and even write small reviews of the things you bought.

Once you see some of the figures besides items you purchased, you might realize just how silly it was. Whether it’s a bad movie you watched or a party that bored you to death, you’re more likely to be watchful and selective in your spending.

If you’re not into the old-school method of writing stuff down, you can look into apps that will give you cash back on your purchases. If you ever shop at a grocery store or convenience store, you can snap a photo of your receipt with the Fetch Rewards app and earn rewards for buying top products like Pepsi and Hershey’s. 

A pre-paid debit card is another great way of tracking your spending. The Current Visa Debit Card for teens can be used to make purchases, set savings goals, and learn good financial habits.

If you have a debit or credit card, Dosh is another great option. Connect your card and Dosh will begin automatically tracking your spending. You’ll get cash back when you buy certain products, as well as refunds if the price on something you buy drops afterward. Once you earn $25, you can transfer the funds to your bank, PayPal, or Venmo.

You can even make use of some of the tools provided by your bank’s own online programs. Many banks are able to categorize your spending and showcase it in easy-to-read charts and graphs. This allows you to see your bank account in real-time and get a better idea how much money you’re spending.

Being less invested with your money means you’re less connected to it—and thus you may spend more. By taking the time to track receipts and write down purchases manually, you will be well-informed where all of your dollars are going and will end up being more cautious with your spending.

4. Ask your parents

Yes, that groan you’re making while looking at this suggestion can be heard all-around. But, it’s not a bad thing to ask your parents for help when trying to save a few bucks.

You can ask your parents to match your weekly or monthly savings by contributing something to your account. If you put aside $25 a week for the month and show your parents that you’ve stuck to that target, you can ask them to contribute $100 at month-end.

Once you’ve shown them that you’re serious about putting aside money, they’ll reach out and help. It’s not a shame to ask them.

5. Do housework

If you’re too prideful to ask your parents for help and want to turn something you don’t like into a money maker, offer to do more chores around the house for more money. Fold laundry, wash clothes, clean, all those things you’re not too fond of doing. You can also watch your little brother or sister at an hourly rate.

You can also offer to buy groceries for your neighbors and help them around their houses as well for a fee, as well as mow their lawns or shovel snow. Turn chores into scores of cash over the while whenever you can.

6. Use your student ID

Another idea you maybe didn’t think about much, your student ID can be so much more than just a card with a less than flattering picture of yourself. As Seventeen Magazine recommends, it can get you up to 10% off at Urban Outfitters, Charlotte Russe, and some of your other favorite retailers.

Getting all the discounts you can make saving a whole lot easier, and ensures you can put more of what you make in a safe place until you need it.

It would also be a good idea to ask about student discounts and deals everywhere you go. Some businesses may not openly advertise their student discounts but would be more than happy to provide them if you ask.

7. Spend smart

When you spend, it doesn’t mean you have to spend alone. Think about sharing costs with your friends or siblings where you can, whether on magazines, trips, books and so on. Capitalize on any interests you share with people by splitting the things you each want.

Also, try and collect as many coupons and gift cards as you can. If the gifts cards you get are for things you’re not interested in buying, feel free to re-sell them. Gift marketplaces like Raise will be happy to flip them for a fee.

8. Get a summer job

If you’re old enough, getting a summer job will help you save some extra cash when necessary.

If you don’t have any significant plans during your summer vacation, why not make money? It keeps you from making regrettable decisions with whatever allowance or little money you may have. Plus, it allows you to keep replenishing your account(s) until it’s time to hit the books again.

Summer jobs are also an excellent opportunity to gain experience. They can help you get better jobs in the future that offer higher pay.

Saving money as a teenager is hard, especially if you haven’t yet developed the skills to make it in the working world. It’s also tough when you have friends who are out buying new clothes and going on weekend trips. But who said you need a wealth of experience to bring in wealth?

Improvising helps, as well as keeping distinct records tracking how much you spend. There are also benefits as a student that you can use to your advantage, apps to help you access your accounts, and you can even turn your hobbies into revenue makers.

What is the Best Investment for Emergency Funds?

With thousands of dollars in play, you’ll want to make sure you keep your emergency fund parked in a safe spot and that you’re getting a return on your cash reserves. But since this cash needs to be readily accessible in case you need it, you have to choose where to keep your emergency fund wisely.

When deciding where to keep your emergency fund, consider these four different accounts that offer easy access and benefits:

1. High-yield bank accounts

A high-yield savings account might be the best place to keep your emergency fund. Not only are your funds accessible in this type of bank account, but you’ll also earn interest on your deposits. To find the right high-yield savings account for your emergency fund, look for options with a competitive interest rate and no monthly fees or balance requirements.

Since certain banks offer “welcome bonuses” for new customers, you can also score an upfront benefit if you meet the terms and requirements.

2. Money market accounts

When deciding where to invest your emergency fund, don’t forget about money market accounts. Money market accounts are similar to savings accounts in that they can offer higher yields. You can open a money market account online or at a local bank, then access your money through web-based account management or at an ATM.

Since money market accounts are easy to use and your funds can be withdrawn at any time, they can be a good option for your emergency savings.

However, be mindful of money market fees that could chip away at your returns. As with any other account, it pays to shop around and compare fees and features before selecting where to keep your emergency fund.

3. Certificates of deposit (CDs)

Certificates of deposit, or CDs, offer a fixed rate of return for a specific length of time (e.g., 1.30% APY for 24 months). Since your rate of return is guaranteed, opening a CD could be a way to earn extra interest on your emergency fund.

Since CDs “tie up your money” where it’s somewhat out of reach, you may have to pay a penalty to close your CD account early to access your funds. To combat this, many people opt to “ladder” their CDs—a term that describes opening multiple CDs with different maturity dates so a certain amount of cash is available at all times.

4. Roth IRA

While a Roth IRA may not seem like the ideal spot to invest your emergency fund, parking your cash there can make sense. By investing your funds conservatively, you may secure higher earnings than a traditional savings vehicle—without taking on too much risk.

A risk you’ll need to consider if you keep your emergency fund here? Your Roth IRA could lose value. Choosing conservative investments for your Roth IRA could help mitigate this risk, but it may not shield you from losses altogether.

Is 1000 Enough for Emergency Fund?

The amount you need depends entirely on your personal circumstances. Here are some examples of when $1,000 is adequate, when it falls short, and how to make the best use of what you have.

When $1,000 Is Enough

Many experts recommend saving three months’ worth of expenses in their emergency fund, but not everyone can afford that. For people who have high credit card debt or low incomes, $1,000 might be all they can save without compromising other priorities.

That amount is enough to cover most emergencies, like a sudden repair on your car, a trip to urgent care or an emergency vet visit. $1,000 will probably cover the bill in each of those cases, and possibly with some money left over.

When it comes to saving for an emergency, the goal should be to minimize the long-term damage an unexpected expense can inflict on your finances.

Even a small emergency fund will save you from the worst-case emergency scenarios – borrowing money from friends or family, taking out a payday loan or pawning off an important possession.

When $1,000 Isn’t Enough

If you have kids, are the sole provider of your family, are self-employed or own a home, $1,000 probably isn’t going to cut it. As anyone with a mortgage knows, the water heater doesn’t care how much you have in your emergency fund when it decides to break.

Self-employed people need more than $1,000 in an emergency fund because their business income can be sporadic and inconsistent. Having an insufficient amount saved can mean taking on jobs that don’t align with your business, or even being forced back into a traditional job to make ends meet.

Similarly, if you work on commission and your salary depends on how many sales you make, $1,000 might be inadequate. Any time you have inconsistent or variable income, you need to try for three to six month’s worth of expenses.

Parents should also try to have a more robust savings account. When you have other people relying on your income, the potential for an emergency expense increases substantially. You don’t want to be stuck choosing between paying a medical bill and putting food on the table.

If you have pets, especially those who are older or have chronic health problems, we recommend having at $2000-$3000 in your emergency fund. Some vet offices only accept cash and require payment before performing an operation, so easily-accessible funds are a must.

If you’re paying off a lot of debt and still have extenuating circumstances, like kids or an unstable job, don’t raid your emergency fund to reach the finish line faster.

Reaching your financial goals is like climbing a mountain, and an emergency fund is like your first aid kit. Sure, you may not need it – but do you really want to take that chance?

How do you Build an Emergency Fund?

1. Calculate the total that you want to save. Use the NerdWallet emergency savings calculator if you need help figuring out how to add up your expenses for six months.

2. Set a monthly savings goal. This will get you into the habit of saving regularly and will make the task less daunting. One way to do this is by automatically transferring funds to your savings account each time you get paid.

3. Keep the change. When you get $1 and $5 bills after breaking a $20, drop some in a jar at home. When the jar fills up, move it into your savings account. If you don’t carry cash, you could try a mobile savings app that makes automatic transfers, with rules that are based on the transactions you make.

4. Move money into your savings account automatically. If your employer offers direct deposit, there’s a good chance they can help you break up your paycheck into multiple checking and savings accounts so that your monthly savings goal is taken care of without ever going to your checking account.

5. Save your tax refund. You get a shot at this once a year at tax time — and only if you expect a refund. Saving it can be an easy way to boost your emergency stash. When you file your taxes, consider having your refund deposited directly into your emergency account.

Alternatively, you can adjust your W-4 tax form so that you have less money withheld. Then direct the extra cash into your emergency fund.

6. Assess and adjust contributions. Check in after a few months to see how much you’re saving, and adjust if you need to add more. This is especially important if you go through an expensive major life event such as marriage or a move to a new city, or have an emergency that causes you to dip into your existing fund.

Why Emergency Funds are a bad Idea?

First of all, exactly how much money are we talking about here?

In the most recent statistics, the median household income in the United States was $63,179 in 2018 according to the most recent data from the U.S. Census Bureau, and the personal savings rate of disposable income has been around 8% since 2018, according to the Bureau of Economic Analysis.

Using the conservative recommendation to sock away eight months’ worth of living expenses for your emergency fund, that means it’d take almost $42,500 to create a sufficiently stocked emergency fund, and that’s before taxes are taken out of your income.

Even using three months of emergency savings, you’d still need $16,000 for an emergency fund that passes the muster of convention. To put that in perspective, the U.S. average household credit card debt was just over $6,000 in 2019 according to data from Experian.

Americans are also carrying a cumulative $1.51 trillion in student loan debt, as of the end of 2019, which dwarfs the credit-card debt on a per-borrower basis.

The point is that adding to emergency savings means you can’t spend on other needs and wants or pay down debt.

Read Also: How to Start an Emergency Fund

If the experts are going to issue a blanket recommendation to millions of people that they should all create a buffer to tie them over in unforeseen circumstances, it would make far more sense to say, “Instead of amassing an account that pays you 0%, or a few basis points above that, maybe you should focus on closing out an account or two that’s costing you 15%.”

Should you be among the subset of the population that enjoys positive net worth and has taken steps to reduce the possibility of being impacted by an emergency, congratulations.

But understand that that’s all the more reason not to create an emergency fund—at least not the classic kind. Because an emergency fund is supposed to be easily accessible and liquid, the recommended vehicle for it is usually a savings account.

Savings accounts don’t even keep pace with inflation, meaning that an emergency fund is a money-losing proposition over the long term.

Finally

Your emergency fund is there to protect you and your family from financial stress caused by unexpected expenses. While you’re not using it, though, your account needs a safe place to grow. Stashed in a high-yield savings account, certificate of deposit (CD), money market account or even a Roth IRA, your emergency fund can continue growing until the day you need it.