A savings plan is a strategy for saving money to achieve personal financial goals, such as accumulating a down payment on a home, building an emergency fund or financing your retirement.
Your savings plan can include your goals, your budget, plans for reaching your goals and the places you’ll save or invest your money. The better your savings plan, the easier it is to stick to.
Here’s how to make a savings plan that works for you.
1. Set goals
Building an emergency fund and saving for retirement are important financial goals for everyone. They can help ensure you avoid debt when unexpected expenses arise and set aside enough money for your future. Here are some other things you might want to save for:
- A down payment on a new car
- A down payment on a house
- Rent and security deposits for an apartment
- A major home purchase such as a refrigerator or new furniture
- Home renovations
- Having or adopting a child
- A child’s college education
- A wedding
- Adopting a pet
- One-time annual expenses, such as property taxes
- Job loss
- Medical emergencies
- Car repairs
- Unexpected housing costs
2. Make a budget
To create a budget, start by adding up your monthly income. Next, list your expenses, breaking them into essentials (such as rent, car payments and student loan payments) and discretionary expenses (such as meals out, streaming services and new clothes). Be sure to include irregular expenses, such as car registration, property taxes or insurance premiums, that are due once or twice a year.
One common budgeting method, the 50-30-20 rule, allocates 50% of your income to essentials, 30% to discretionary spending and 20% to savings, including retirement savings and paying down debt. If that’s not realistic right now, aim to save 5% to 10% of your income—or whatever you can. If there’s no wiggle room in your budget, look for ways to reduce your expenses, such as cutting back on nonessentials.
3. Decide on time frames
You’ll probably have a combination of short, medium and long-term financial goals. Listing them all out will help you allocate enough to each.
Short-term goals can generally be accomplished within one to two years. They might include:
- Buying a new sofa
- Paying for a vacation
Medium-term goals, which typically take three to seven years, might include:
- Making a down payment on a new car
- Making a down payment on a home
Long-term goals, which usually take 10 to 15 years or more, include:
- Saving for retirement
- Financing your child’s college education
4. Find the best place for your savings
The ideal spot for your savings depends mostly on how soon you expect to need the money. Here are some options to consider:
- High-yield savings accounts and money market accounts generally earn a higher rate of return than traditional savings accounts, while offering easy access to your money.
- Certificates of deposit (CDs) are savings vehicles that generally offer higher APYs than traditional savings accounts. Interest rates are typically guaranteed for the term of the CD, which usually lasts from a few months to five years. When the CD matures, you receive your initial deposit plus interest.
- Tax-advantaged retirement accounts can help you achieve your retirement savings goals. These accounts typically invest your savings in the stock market, which historically delivers higher returns than savings accounts over time. If you don’t have an employer-sponsored 401(k) plan at work, you can open an individual retirement account (IRA).
Creating a savings plan is one of the most empowering steps you can take toward financial stability and peace of mind. By setting clear goals, building a realistic budget, choosing appropriate time frames, and selecting the right savings vehicles, you’re laying the groundwork for a more secure future.
For more information on budgeting, see the following articles: