Financial literacy is about comprehending the basics of banking, budgeting and investing so that you’re able to use money wisely…and the first step of that is to understand your personal income statement. A solid perspective on your “money in and money out,” combined with practical long-term planning, will help you develop a budget that allows you to live comfortably while saving for your future.
Unfortunately, the average consumer isn’t as financially literate as he or she should be. A survey conducted by Northwestern Mutual Life, “The State of Planning in America,” revealed that 69% of respondents fail the portion of the survey on general financial knowledge. Dozens of similar surveys reveal much the same thing.
That shallow depth of financial knowledge translates, to some degree, to failure to budget properly for both short-term and long-term personal financial health. In 2010, 3 out of 4 Americans nearing retirement had less than $30,000 in their retirement accounts, according to Economic Policy Research. That’s frighteningly short of what’s recommended for a comfortable lifestyle post-retirement.
Here are some steps to help you improve your financial literacy and make your money work harder for you today so that your tomorrow is more secure:
- Understand your budget. A commitment to financial health starts with taking an open and very honest look at what’s on your plate today. Your personal income statement needs to take into account your monthly revenue, and installment debt payments such as mortgage, home equity, education loans and credit cards, and predictable monthly expenses such as groceries, clothing, phone, cable, and utilities. Don’t stop there, though. You also need to include a line item that requires you to contribute each month to your retirement fund. This represents the best investment you’ll ever make, because it’s an investment in you.
- Understand your debt. It’s important to know the interest rates of your various obligations – knowing how much you allocate towards interest and principle with each payment will help you pay down the most critical ones first. Lining up your debts by interest rate and paying down those with the highest rates first will save on interest payments over time. For instance, you’ll want to pay off that credit card with the 20% interest rate before you pay off a retailer card with a 12% interest rate.If you’re looking for a more rewarding strategy for getting rid of your debt, pay off the smallest principle balance first, then close that account. Removing a single creditor from your list of obligations gives you the motivation to move on and do the same to others. When you consider the average credit card debt per U.S. consumer increased over the last year by more than $270 – for an average credit card debt of close to $5,000 (according to TransUnion) – this approach could provide that quick reward you’re looking for.
- Use your debt wisely. Remember that not all debts are bad. When you look at your credit report from any of the 3 major reporting agencies, you’ll notice a component of your report is based on your outstanding debt in relation to the total amount of credit you’re allotted. Essentially, if you have a small amount of debt but a huge limit, you’re seen as being smart with your purchases and payments, and that reflects well on your credit report. Read more about credit reports in one of our recent blog posts, “Want Good Credit? Know and Understand Your Score.” http://blog.fnbfoxvalley.com/2013/01/11/want-good-credit-know-and-understand-your-score/
- Pay yourself. Savings should be a rigid line item in your budget, not an afterthought or something that’s simply “nice to have” but not mandatory. At the very least, your savings should be able to cover 3 to 6 months of bills should you lose your job. Forty percent of American, unfortunately, have no such savings and are living paycheck-to-paycheck.
- Retirement savings should include a 401(k) or 403(b), an IRA and possibly a Roth IRA. If your employer offers a 401(k) with match, take it! It’s free money! Contributing $50 to $100 a paycheck to your 401(k) is investing towards a time that comes sooner than you think: retirement. And it reduces your taxable income, so your return on that investment is instantaneous!
Set reasonable goals for your financial future – and stick to them. The team at FNB Fox Valley is ready to talk about securing your financial future and getting your money working harder for you – starting today! Write or call to talk about developing a budget, getting started with an IRA or any topic that helps you get your finances in tip-top shape.