Making the commitment to become a steady saver is a vital first step toward financial peace of mind and, ultimately, greater security and wealth.

Now comes the fun part: In order to reach the “greater security and wealth” part of the equation, you must learn how to make your savings grow, thanks to--you’ve heard it before—“the miracle of compound interest.”

How Money Snowballs
What exactly is compound interest? And what makes it so miraculous?

If you saved $50 per month, by putting into a zero-interest coffee can, at the end of 10 years you would end up with $6,000 stashed in your little can ($50 X 12 = $600. $600 X 10 years = $6,000). Sounds OK.

Now, let’s assume that you deposited your savings into an account that earned 3% interest per year. In 10 years you’d have about $6,990—almost $1,000 more.

That’s because, every year you’d earn interest on your deposits, and the next year you’d earn interest on your interest (plus the additional deposits)…and your cash would snowball. You can see it for yourself in this chart, and plug in some of your own numbers into this calculator.


The Magic of Time
The sooner you begin saving, and the longer you allow compound interest to work its magic, the more money you’ll gain.

If you also save money in your retirement account (and we hope you are), that money is usually invested in mutual funds, which typically have an even higher yield over time. If you deposit $100 per month into your 401k, let’s say, which earned 8% per year on average, for 30 years, you’d end up with about $141,761.

Your total cash contributions over 30 years would be only $36,000—but the compound return from the stock market would give you an additional $105,761.

It’s a powerful reminder that even the smallest steps in the right direction add up to big changes—and in some cases big money—over time.

Where to Find the Best Rates
How much interest does your savings account yield now? You can check your statement or call your bank or credit union, but don’t be surprised if the interest rate is disappointingly low—perhaps less than 1%.

That’s all right. Many institutions offer higher rates if you’re willing to look beyond the bank next door. You can set up automatic, secure electronic deposits to almost any account that offers a good rate. A savings account is simplest, but for higher yields, you may want to consider a money market account (MMA) or a certificate of deposit (CD).

Money market accounts and CDs have more restrictions; most limit the access to your cash, and some have minimum deposit requirements.

The sooner you start looking, the faster your money will grow.

Good luck and keep saving!

This month's e-Wealth Coach is Michael Gutter. Dr. Michael S. Gutter is an Assistant Professor and Family Financial Management State Specialist for the University of Florida. His Ph.D. is in Family Resource Management from The Ohio State University. Gutter has published research relating to saving behavior, racial differences in financial behavior, and the relationship of financial socialization on financial behavior. He led the effort to establish Florida Saves.

With 2010 under way, many of us are starting to receive our tax documents in the mail or at work. Tax season is a great time to jumpstart your savings. Here are some tips to keep in mind this tax season.

Avoid Expensive Preparers or Loans
Keep more of your own money by avoiding expensive tax preparation or refund-anticipation loans. Many communities have Volunteer Income Tax Assistance (VITA) sites available which provide electronic filing and tax-preparation assistance at no charge for many taxpayers.  You can find your local tax resources by zip code on the IRS website.

If you do decide to use a paid tax preparation service, you can keep your cost down by declining any refund-anticipation-loan (RAL) products.  E-Filing and direct depositing your refund can reduce your waiting time and avoid these cost services. Refund-anticipation-loans have high fees, and not using a RAL can save you an additional $100.   By waiting, you could use that extra money you did not spend on the RAL to contribute to savings or pay down debt.

Pay Only What You Must
In order to maximize your tax refund, work to reduce your income subject to taxes by taking advantage of tax deductions and credits. Deductions lower your taxable income, and credits lower your taxes. Tax deductions can include interest expenses on student loans, medical expenses, contributions to qualified retirement plans. If you can itemize certain expenses, then you can deduct mortgage interest paid, taxes paid, charitable gifts, and more.

Regardless of whether you utilize a standard or itemized deduction, everyone can take advantage of tax credits. Like deductions, credits can help you receive a larger refund.  The Earned Income Tax Credit is a tax credit for lower-income families and can even be refundable. This means you are entitled to the full amount of the credit even if it exceeds the amount you face in taxes. You can use more than one deduction and credit. Having someone else check you tax return can help you to not miss any savings opportunity. For each new deduction or credit you find, utilize a portion of the savings to add to your savings account or pay down debt.

For basic information on taxes check out the University of Florida’s fact sheet on “Federal Income Tax Management”  and additional resources.  

Pay Yourself First
When it comes to increasing savings, the old wisdom of paying yourself first comes to mind. Now with IRS Form 8888 you can directly deposit funds from your tax return into up to three different accounts, including your savings account. Form 8888 is a good way to save automatically, open new accounts, or add to existing accounts. By setting aside money that hasn't yet reached the individual's hands, there is an opportunity for painless savings. Form 8888 is available at most tax preparer sites or where you can find tax forms.

It’s Not Too Late for Retirement Savings
Even though 2009 has come and gone, you can still help your tax bill by maximizing your contributions to tax-advantaged retirement accounts. Contributions to a traditional individual retirement account (IRA) can reduce your taxable income and can be made up until you file your tax return for the previous years. Traditional IRA contributions grow tax-deferred and can be invested in many types of assets including mutual funds.

Remember to take advantage of every deduction and credit you can! Taxes can impact your saving and investing and are a great way to start saving. For more information on saving and investing, click here.

It seems like you can’t turn on the television or the radio without hearing advertisements from companies that promise to settle your debts for 50 cents on the dollar. It’s an attractive offer, especially if you, like many consumers, are struggling with your finances. There are organizations that may be able to help you, but using a debt settlement company could be a trap that will leave you deeper in debt instead of eliminating your debts.

In debt settlement, you are instructed to make monthly savings payments, usually to a special bank account, until there is enough to make a lump-sum settlement offer to your creditors. But while you are putting money into your account, the debt settlement company is taking its fee out. Saving to try to settle one debt can take a year or more, and since most people typically have multiple debts they want to try to settle, the process can take three or four years. However, debt settlement companies usually take out all of their fees, ranging from 14 to 20 percent of the total debt, within the first several months of the contract. For debts totaling $20,000, you could pay fees of $2,800 to $4,000.

In fact, debt settlement companies usually collect most or all of their fees from consumers long before they have eliminated any of their debts. There is no guarantee that your debts will be settled, and you’ll pay regardless of whether they are or not. It’s hard to save up enough to make a settlement offer when a significant amount of your savings is being siphoned off to pay these fees. That may be one reason why the drop-out rate for debt settlement services is so high. A study of one company’s customers revealed that 60 percent had cancelled within 5 to 6 months after starting debt settlement. Claims for success rates can be very misleading because they often don’t take into consideration the cost of the fees consumer pay or the size of those debts that are never settled.

Another thing that many consumers may not realize is that using a debt settlement program doesn’t stop debt collection and could make their debt situations worse. Debt settlement companies often don’t contact the creditors for months, and creditors are not obliged to deal with them. Some debt settlement companies even tell consumers not to have any contact with their creditors and to stop making any payments to them in the meantime. As a result, the consumers’ debts increase because of interest and penalties, and they may end up being hounded by debt collectors, sued by their creditors, having their wages garnished, and left with ruined credit ratings.

Consumer Federation of America, Consumer Action, Consumers Union, and the National Consumer Law Center have issued tips for consumers in both English and Spanish on how to avoid the debt settlement trap and get real relief. The first step is to resolve your debt problems with your creditors directly, but if that doesn’t work, a nonprofit consumer credit counseling service can give you advice and may be able to make payment plans with your creditors. There may be a small fee for the counseling service to administer the plans, but you’ll be paying with the certainty that you are actually paying down your debts and not just throwing money out the window.

Consumer Federation of America and several other groups have also urged the Federal Trade Commission to crack down on abuses by debt settlement services and companies that offer other types of debt relief, such as lowering consumers’ interest rates. In our comments to the FTC we said that for-profit debt relief services should not be allowed to ask consumers to pay more than a very small set-up fee until they have accomplished the results that they promised. If you’re looking for a debt settlement service, find one that only charges when it has actually settled your debts. If you need help dealing with your mortgage payments (which debt settlement companies don’t address) find a certified local housing counselor who can advise and assist you.

It's a new year and the start of the tax season and many of you are taking a hard look at your finances. Saving money and/or reducing debt remain one of the most popular resolutions remain each year. Make 2010 your year for financial action. Even with the recession, you can make changes to improve your financial future by:

• Start (or add to) an emergency fund. An emergency fund is your protection against unexpected expenses. Having an emergency savings fund may be the most important difference between those who manage to stay afloat and those who are sinking financially. That's because maintaining emergency savings of $500 to $1,000 allows you to easily meet unexpected financial challenges such as car repair or a medical bill and avoid high interest, short-term loans.
• Track your spending. If you're looking for ways to cut back, your first course of action should be to know where your money is currently going. Knowing how you and your family spend money can help identify areas to reduce your spending.
• Let go of bad habits and bank your savings. A simple behavior change, like bringing your lunch to work rather than buying, can add up to big savings over time. Find one or two things in your life (i.e. cable television) to cut back on and bank the difference. What you don't see, you will probably not miss.
• Go automatic! Treat savings like another bill by setting up automatic monthly transfers at your financial institution from your checking to savings account or having a portion of your paycheck directly deposited into your savings. Savers who save automatically are more likely to be successful long-term.
• Save all or part of your tax refund. With IRS Form 8888, you can choose to save all or part of your tax refund.
• Take advantage of free money at work. Many employees turn down free money from their employer by not signing up for a work-related retirement program such as a 401(k) plan. Savers with a dollar-for-dollar match would likely receive an annual yield of greater than 100% on their investment.