Credit unions should help members manage the money they save from refinancing their mortgage.
Credit unions have been doing a fantastic job of refinancing members’ mortgages and helping them save money on probably their largest fixed monthly expense. But are they encouraging their members to take a portion of that savings and actually save it?
According to a recent Bankrate.com study, 28% of Americans do not have any emergency savings. That means that more than one in four people would have to take out a loan or turn to credit cards to cover an unexpected expense like a medical bill or a major car problem.
Most financial experts say that the average person needs at least three to six months worth of expenses saved up to avoid going into debt due to a job loss or some other kind of unforeseen event. Some even recommend having more in savings due to the possibility of prolonged unemployment from the recession. While this may seem like a daunting goal to people who have no savings, credit unions can get members on the road to financial freedom by helping them start small.
If a credit union refinances a member’s mortgage and reduces their monthly mortgage payment by $100, perhaps the credit union representative could encourage the member to set up an automatic transfer from their checking account to their savings account of $50 per month. The $50 won’t be missed because the member was already paying that to their mortgage lender, but it would be a great start to working towards having a fully-funded emergency fund.
Setting up an automatic transfer from checking to savings on a specific date – payday would work well – can help members get into the habit of saving. It also reduces the chance that a member will forget to go online or to a branch and make the transfer themselves.
An argument could be made that people would be better off paying down other debts with that extra $100 a month. While this would also help improve a person’s financial situation, the fact is that if they reduce all of their debts but have nothing saved they could find themselves in a terrible situation. If they need $1,000 for a hospital bill, they will need to go back into debt to pay that off. And if they’ve paid off their debt, nothing says they will get access to the same amount of credit again. After getting an emergency savings in place, using extra money to pay off debts makes the most financial sense.
Credit unions can also help members who don’t have a mortgage loan save. If a young Gen Y or Gen X member comes in to open an account, employees could demonstrate to them the power of compounding interest. Many young people are not too concerned with retirement – it’s something that is 40 or more years down the road for them. But if they were shown how much money they could have in retirement if they started contributing even $20 or so per month right now, it might encourage them to save a little instead of spending $5 on a latte every morning at Starbucks.
The credit union cooperative model is all about helping the member. And nothing is as important as helping someone live without the stress of worrying how they are going to pay for the unexpected events life throws at them. Getting started early and starting small can help your refinancing members achieve the financial freedom they deserve.