What Is A Savings Plan?

Most of us feel the need to put some money aside at one time or another. Whether you need funds for a celebration, your next vacation or more long term goals such as a new car or home deposit, a savings plan can be extremely helpful. Whether your goal is to save money for something specific or create a rainy day fund, in this article, we’ll explore savings plans with some practical advice to help you implement one. 

The Savings Plan Basics:

Saving money can be challenging and while you may have good intentions to put away money each month, without a plan, you are essentially working in the dark. A savings plan provides a blueprint to work towards your financial goals. When you implement a savings plan, you’re creating an action plan to highlight how much and how often you should be putting funds into your designated savings account. Fortunately, you don’t need a financial wizard to craft a formal savings plan for you, as they are quite simple to create for yourself. 

Steps to Create Your Own Savings Plan:

Everyone’s financial circumstances are unique, so you need a personalized savings plan, but it doesn’t need to be overly complicated. There are a few key steps you’ll need to follow, but this will allow you to have a customized plan to meet your savings goals. 

Make a Financial Inventory:

Just like you can’t use a map unless you know where you are right now, you need to know your current financial position before you can get started with your savings plan. Many people find this a little daunting, but it is better to be fully aware of your current situation so you can take appropriate action. Sit down for a few minutes and create a list of any liquid assets such as funds in your checking and savings accounts, along with a list of liabilities such as home loans, auto loans, credit card balances and other debts. With these lists you can assess what funds are available for your new savings plan. Although your ultimate goal may be to save as much as possible, you still need to service all your debts and make payments to clear these outstanding amounts. If you find that your total liabilities are actually more than you thought, you may need to shift focus into paying down your debts and return to creating a savings plan later. 

Set Goals:

Now, you need to set your savings goals. These can be short term for immediate plans, such as creating an emergency fund, or long term, for example, funding retirement, paying for your childrens’ education or saving for a new home. In reality, you’re likely to have multiple savings goals, so make a list of what you want and a figure needed for each. This will allow you to work out how much you can direct into the fund for each goal. It can be helpful to think in terms of up to three years as a short term goal, medium term as three to seven years and long term for things more than seven years in the future. For example, you may want to save for a vacation as a short term goal, a new car in the medium term and a new home as a long term goal. If you’re already using a budget, you are likely to have a fairly accurate idea of what you can save, On the other hand, if you don’t have a budget in place, you will need to work out your current expenses and deduct this figure from your monthly income for a realistic figure of what you can afford. How you split this amount between your various savings goals will be at your discretion, but it is important to not kick the ball down the road and forget about your long term goals.There is a temptation to focus on the quicker fix of achieving your short term goals, but this could compromise being able to reach your medium and long term goals. So, even if you plan on trying to quickly achieve a short term goal, be sure to put at least something away regularly to each of your long term goals. For example, you may put 60% of your savings into your short term goal and leave 20% each for your medium and long term goals. This will help you to make consistent progress towards all of your goals. 

Choose Appropriate Accounts:

Now you have set your savings goals, you need to think about where you will keep your funds. Savings accounts or Certificates of Deposit (CDs) can be an appropriate choice for short term savings, as you can usually access the funds with minimal delays. However, if you want to get the best returns for your longer term goals, you should think about investment accounts, money market accounts or tax advantaged accounts. While this may lock in your money, if you’re not planning on using the funds for five to seven years, you shouldn’t incur any withdrawal penalties. Once you’ve set up your accounts, you can then allocate funds according to your savings plan. It is a good idea to set up auto payments for each paycheck, so you remove the thought from the process and you will not neglect your savings. You can just check in regularly to view the progress towards your goals. 

Maximize Your Savings:

When your savings plan is set, you should try to look for opportunities to maximize your savings. For example, if you receive a tax rebate, put all or most of it straight into your savings to boost the balance. You may also qualify for other savings bonuses. For example, if you have a workplace 401k, you may be able to get an employer match. In this case, check the contribution limits to get the most benefit.

Review:

Finally, be sure to review your savings plan regularly. This can not only allow you to check what progress you’re making, but you can review your spending to ensure that your budget is on track. You may even find extra money that you could save.