Feb. 25 to March 2, 2013, is America Saves Week, an annual event sponsored by the Consumer Federation of America to encourage saving, debt reduction and wealth building among adults. In honor of America Saves Week, use the following tips and resources to assess and improve your savings plan.
1. Develop a budget. The first step toward developing a savings plan is to do a realistic assessment of how much money you take in and how much money you spend. Start by listing your income from all sources. Then, list your fixed expenses -- those that are the same each month -- such mortgage payments or rent, car payments and insurance premiums. Next, list the expenses that vary -- such as entertainment, recreation and clothing. Writing down all your expenses, even those that seem insignificant, is a helpful way to track your spending patterns, identify necessary expenses and prioritize the rest. Set realistic goals for cutting expenses and saving money.
2. Reduce your debt. After you've established your budget, you'll be prepared to start paying down your existing debt, such as credit cards and student loans. Try to pay more than the minimum due. Generally, it is a good idea to pay off debt with highest interest rates first.
3. Pay your bills on time. This saves added expenses such as late fees, extra finance charges and disconnection/reconnection fees.
4. Calculate your net worth—the dollar amount representing all your assets minus your debts. Find out your current and future net worth with America Saves’ Personal Wealth Estimator at http://www.americasaves.org/for-savers/201. By listing your financial and nonfinancial assets and debts, the Personal Wealth Estimator is able to calculate your current and future wealth for 5, 10, 20, 30, 40 or 50 years. Your aim is to create a positive net worth, and you want it to grow each year. Your net worth is part of what you will draw on to pay for financial goals and your retirement. A strong net worth will also help you through financial crises.
5. Establish an emergency fund that can be used in case of financial emergencies such as hospital bills or loss of a job. Determine how much money you are able put aside each month, then deposit that amount in a savings account at your local bank. Financial advisors generally suggest saving enough money to cover your living expenses for three to six months.
6. Save for retirement. The Ballpark Estimate worksheet, found at www.choosetosave.org/ballpark, helps you quickly and easily determine how much money you need to save to live comfortably in retirement. Ballpark takes issues like Social Security benefits and earnings and converts it into figures that are easy to understand. If your work offers a retirement plan, such as a 401(k) plan, that deducts money from your paycheck, join it. Try to contribute at least as much as your employer is willing to match.
7. Set up a direct deposit and an automatic transfer to your savings account. When you get paid, put a portion in savings through direct deposit or automatic transfer. Almost all banks will, upon request, automatically transfer funds monthly from your checking account to a savings account.
8. Save a portion of tax refunds, gifts or bonuses. Before you frivolously spend these or any other financial windfalls, consider using the extra funds to contribute to an IRA, make an extra credit card payment, buy a savings bond or put it toward one of many other options that will benefit your financial future.
9. Consider increasing your monthly mortgage payment. The largest asset of most middle-income families is their home equity. Once these families have made their last mortgage payment, they have far lower housing expenses. They also have an asset that can be borrowed on in emergencies or converted into cash through sale of the home.
10. Build equity in your home or other property. Before tapping into the equity of your home to send your child to college, remodel your home or pay off your credit card debt, consider the pros and cons. While it may permit a higher borrowing limit, your home is considered collateral if you cannot make the payments. Only you can decide if this option is right for you.
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