7 Financial Literacy Tips to Boost Your Savings Potential

blog-97-7-financial-literacy-tips-to-boost-your-savings-potential

Managing your money—and life itself—starts with financial literacy, or understanding how your personal finances and investing work. If you’ve got the skills and know-how to manage debt, build savings, and handle investments, then you’re among the 57 percent of Americans who are financially literate, according to a survey by Standard & Poor.  

For example, do you understand how compound interest works? Compound interest is the foundation for most savings accounts and determines how much money savings can accumulate over time. Understanding how to apply compound interest as part of your personal financial plan could mean earning thousands of dollars more on your savings.

With total U.S. household debt at $13.86 trillion and climbing, according to the New York Fed, financial literacy is crucial for securing your financial future. In fact, according to a study by the National Financial Educators Council, financial illiteracy cost the average American $1,230 in 2018, which is nearly 2 percent of the U.S. median household income of $61,937.

If you’re ready to start saving, there is no better time than now. Here are seven strategies that can help you increase your savings and foster your financial literacy: 

1. Master the art of budgeting. 

Managing your money, including building your savings, starts with budgeting. Before you can decide how to allocate your money, you have to understand your income and expenses. But basic budgeting doesn’t have to be daunting. Start with a blank sheet of paper and create two columns:

  • Column one: List all of your sources of monthly income, such as paychecks, alimony, and money from a side business.
  • Column two: . Let all your monthly expenses, including fixed expenses such as rent and loan payments, and an average of variable expenses such as utilities and food. 

Then, add up each column. The goal here is for your income to exceed your expenses. You now have a working budget.

iQ’s financial education programs help children and adults explore a range of  financial concepts with interactive online courses, games, handouts, and more.  Learn more →

2. Set aside surplus cash for savings. 

When you’ve created your budget, you should earmark some of your surplus cash for savings. To build your savings, add a line item in your monthly budget for your savings account. If you adhere to the 50/30/20 rule, then 20 percent of your monthly income should go to savings. The best place to start saving is with a savings account or money market account where you can automatically deposit savings so that it will earn compound interest. 

3. Help your money make money. 

Most savings and money market accounts pay compound interest. This means they pay interest on the total amount you have in your account each month (i.e., the total including your initial deposit and any interest earned to date). Sometimes referred to as “the miracle of compound interest,” savings accounts can help you accumulate more money than if you just set money aside each month. Consider this: If you deposit $50 per month at 5% compound interest, in 40 years you’ll have saved $76,301, which can go a long way when you’re ready to go on the trip of a lifetime or retire. 

4. Expect the best, but plan for the worst. 

You can’t plan for the unexpected, so putting money in an emergency fund can provide a financial cushion in case you lose your job, become ill, or face some other unforeseen event. Expert opinions vary as to how much to save, but try to set aside between two and six months of living expenses just in case. Even starting with a few hundred dollars can give you peace of mind—and compound interest can help you build your fund too.

5. Plan for your financial future. 

Retirement planning combines the best of budgeting and savings strategies so you can have enough money to retire. Planning for retirement is a lifelong process and includes: 

  • Calculating how much money you need to retire
  • How much you need to save to get there
  • Where to place your money to get maximum returns

There are many moving parts in retirement planning, including accurately estimating cost of living, balancing risk and returns when choosing investment strategies, and so on. We recommend consulting a professional to help you develop and manage your retirement plan.  

6. Establish equity through homeownership. 

There are different ways to build savings, and one of them is by building equity in your home. Equity is the difference between the value of your property and what you owe against that property. With home prices predicted to rise 5.8% through August 2020, according to the CoreLogic Chief Economist Frank Nothaft, if you own your own home, chances are that the value of your property is increasing, and so is your home equity. 

As the value of your home rises, you can use your home equity to borrow money if you need it to make improvements, pay down debt, or even leverage the funds for your retirement strategy. Buying a home is one of the best investments you can make, and you should consider home equity to be part of your wealth management strategy.

7. Save money as you spend money.

Easy Saver is unique to iQ Credit Union, but the idea is similar to that of other savings mechanisms offered by banks and credit unions. With the iQ Easy Saver program, you can easily and seamlessly build your savings every single time you use your checking account debit card. With each transaction, we’ll round the amount up to the nearest dollar and deposit the difference into your savings account. 

As you work to develop your financial literacy, you’ll recognize new savings, retirement, and wealth management strategies—especially if you have trusted financial experts to guide and support you. Expanding your financial literacy and exploring new savings strategies should be a lifelong endeavor, and iQ Credit Union is committed to helping our members navigate their own financial journeys and plan for the future.

New call-to-action

Comments

Subscribe Here!