GOLDEN VALLEY, Minn. - April is Financial Literacy Month and according to a recent study by the Financial Industry Regulatory Authority, Americans have some serious room for improvement. The study found two out of three U.S. adults “lack financial literacy” and only 37% of Americans could pass a basic financial knowledge test. Justin Halverson from Great Waters Financial joined us with five things financially savvy people do that you can implement now so feel confident in your financial future.
1. Pay yourself first. Paying yourself first means saving before anything else. Financially savvy people set aside a portion of their income before spending any discretionary money. Too often people wait to save and only pay themselves if there’s something left. That’s paying yourself last. \A good rule of thumb to remember. If you don’t see it, you don’t miss it; so, take money off the top to save for things that are important to you.
2. Understand you’re on your own. Or at least you should plan that way. Social Security and other benefits are here today, but how they will look for future generations of retirees is less of a certainty. Commit to saving for your own financial future through work place retirement plans, IRAs and other saving and investment vehicles. Consider any future government benefits a bonus and commit to saving diligently so you can afford your own financial future. Take advantage of an individual retirement account or 401(k) plans. In 2017, the contribution limit for a 401(k) plan is $18,000. Investors over age 50 are allowed catch-up contributions and can generally add an additional $6,000, for a total of $24,000 for the year. The contribution limit for traditional and Roth IRAs is $5,500 and $6,500 for those over 50. For the self-employed, contributions are even greater: SEP-IRA $54,000 and solo 401(k) plan $60,000.
3. Diversify your money. Just because you have multiple funds does not mean you’re diversified. Many investments within those various funds can be similar – leaving you very un-diversified portfolio. Take stock of your holdings; you likely have more of the same than you think. To build a diversified portfolio, you should not only review the underlying investments in your accounts, but also consider different types of investments —equities, fixed income, real estate or others—that are uncorrelated and don’t all move in the same direction. This can help give you a better hedge against market volatility over time.
4. Bite back on fees. Don’t let fees take a bite out of your savings and investments; take notice of the fees you’re paying on your accounts. They can add up considerably over the long-term. You often hear about the benefits of compounding interest, but there’s also something known as “compounding fees.” In a recent study of millennial investors, analysis showed that in some investments with hidden fees, “paying just one percent in fees would cost a millennial more than $590,000 in sacrificed returns over 40 years of saving.” It’s in your best interest to always ask what fees you will incur with an investment. Getting into an investment with excessive fees could do serious damage to your future retirement plans.
5. Reduce your taxes. There’s nothing patriotic in overpaying your taxes, so take advantage of all the deductions and credits available to you. Additionally, how you structure your various investment accounts can impact your tax situation as well. You can effectively change your tax burden in several ways including: deferring your taxes with tax-advantaged accounts such as 401(k)s, 403(b)s, IRAs; managing your tax burden by taking advantage of charitable gifts and capital loss deductions; or reducing taxes at the time of distribution from accounts like a Roth IRA or 529 college savings account.