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Do You Need a Savings Plan? And How Do You Make One?

2 months ago
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Chances are you do, and it’s not complicated

Fact checked by Timothy LiReviewed by Margaret JamesFact checked by Timothy LiReviewed by Margaret James

Saving money is central to achieving both short- and long-term financial goals, such as building an emergency fund, saving for a vacation, or putting aside money toward a down payment on a home. As of August 2024, the personal savings rate was 4.8%, meaning that the average U.S. household saves less than 10% of disposable income annually. Creating a savings plan can help to increase your personal savings rate.

What You Need to Know

  • A savings plan is a blueprint for achieving your financial goals, which may include saving for emergencies or planning for retirement.
  • Creating a realistic budget can help with developing a consistent savings plan.
  • Automating deposits into savings or investment accounts can help you avoid spending money that would otherwise be earmarked for saving.
  • Reviewing your savings plan regularly can help you gauge your progress and determine whether any adjustments are necessary.

Understanding a Savings Plan

A savings plan is a method for amassing money in order to reach specific financial goals. It enumerates the goals in question and the steps needed to reach them. Such goals may include:

  • Emergency savings
  • Vacation plans
  • Wedding arrangements
  • Buying a home
  • Home repairs or improvements
  • Purchasing a vehicle
  • College planning
  • Retirement savings

The types of financial goals you include in a savings plan will depend on your individual financial situation.

Important

Saving and investing aren’t the same thing because saving usually means adding money to a bank account, while investing means putting your money into the stock market.

How to Create a Savings Plan

Creating a personalized savings plan doesn’t have to be complicated. Here is a checklist to follow that can make the process easier.

Step 1: Start with a financial inventory

Knowing where you stand financially can help you determine your starting point for shaping a savings plan. Begin by creating a financial inventory, which is simply a list of your liquid assets and liabilities.

Assets could include:

These are assets you could tap into for cash fairly quickly. You may also have other assets that are less liquid, such as vehicles or homes.

Liabilities could include:

  • Credit card debt
  • Student loan
  • Car loan
  • Mortgage
  • Business loan
  • Personal loan
  • Medical bills

Subtracting your total liabilities from your total assets will give you your net worth. According to Federal Reserve data, total household net worth reached $163.8 trillion as of the second quarter of 2024. According to a 2023 survey from the Federal Reserve, the average net worth is around $1,063,700, while the median net worth is closer to $192,900.

You can use an online calculator to estimate your net worth as part of your financial inventory.

Step 2: Establish your savings goals

The next step is determining goals, whether short term or long term, to include in your savings plan. Short-term goals include things you need to save money for in the near term. For example, one of your priorities may be saving for emergencies. This is a fairly common goal: 45% of workers say that paying for a $400 emergency expense out of pocket would be difficult, according to a 2021 Bipartisan Policy Center survey.

Long-term goals don’t require immediate cash. Retirement and college are but two examples. In terms of the amount saved, long-term goals may be larger than short-term goals, but you have a longer time frame in which to execute your savings plan.

When setting financial goals for your savings plan, keep them S.M.A.R.T.:

  • Specific
  • Measurable
  • Achievable
  • Realistic
  • Time bound

For example, rather than creating a vague goal like saving money for emergencies, you could set a S.M.A.R.T. goal of saving $10,000 in 12 months. This goal is specific because you have a set dollar amount in mind and measurable because you can track your progress month to month. There’s also a time element because you’re giving yourself 12 months to reach it.

Whether the goal checks off achievable and realistic boxes can depend on how much money you’re able to save each month. This is where the next step in the savings plan process comes into it.

Step 3: Decide how much to allocate to each goal

A savings plan only works when you are committed to it and have money to save each month. If you have a monthly budget, then you may already have an idea of how much extra money you have available to save each month. If you’re not a regular budgeter, you’ll need to first add up your income and subtract your expenses to calculate how much you can realistically afford to save.

Let’s use the average household income and annual consumer expenditures as an example. According to the U.S. Department of Labor’s Bureau of Labor Statistics, the typical household made $84,352 in 2020. Meanwhile, the average household spent $61,334.

Using those numbers, the average monthly income works out to $7,029. Average monthly spending is $5,111. If your income and spending align with those numbers, you have roughly $1,918 left each month that you can apply to your savings plan.

Now, say you have three savings goals:

  • Vacation fund: $2,000
  • Home repair fund: $5,000
  • Emergency fund: $10,000

You want to complete the vacation fund in six months, the home repair fund in six months, and the emergency fund in 12 months. Based on those time frames, here’s how your monthly savings would need to break down:

  • Vacation fund: $333/month x six months
  • Home repair fund: $833/month x six months
  • Emergency fund: $833/month x 12 months

The total comes to $1,999, making you $81 shy of what you need to reach your goals. The easiest way to make up for the shortfall would be to review your budget and reduce spending to find $81 you could redirect to savings. Accomplish that and your goal is achievable and realistic, as well as specific, measurable, and time bound.

Important

If you’re contributing to a 401(k) at work through payroll deductions, you wouldn’t include those amounts in your income or expenses.

Step 4: Decide where to keep your savings

When you have your goals in mind, you can think about where you want to keep the funds. Your options include:

The option you choose can depend on the goal. For example, if you’re saving for emergencies, then your money needs to be easily accessible. At the same time, you may want to earn a high rate of interest on your savings. Therefore, a high-yield savings account could be the best option.

With retirement savings, you can choose between tax-advantaged and taxable accounts. Tax-advantaged accounts, such as a 401(k) or an IRA, can yield tax benefits. They are designed for long-term savings because you generally can’t take money out before age 59½ without triggering an early withdrawal penalty.

On the other hand, you can use online brokerage accounts to invest money that you may need for short- or long-term goals. The catch, however, is that if you sell assets in a brokerage account for a profit, you’ll owe capital gains tax.

Automating deposits into savings accounts, retirement accounts, or investment accounts is a simple way to ensure that you’re making progress toward your goals.

Step 5: Maximize your savings plan

When you’ve got your savings plan in place, look for opportunities to make the most of it. For example, if you’re contributing to a 401(k) at work, check your annual contribution limits. Are you contributing enough to get the full employer match if one is offered? If not, then you may want to contact your benefits coordinator to increase your contributions.

You can also maximize your savings plan by earmarking windfalls or unexpected amounts of money that come your way for one or more of your goals. For example, the average tax refund for 2023 was $3,167. If you typically receive a tax refund, you could put that amount directly into savings so there’s no temptation to spend it.

Reviewing your savings plan monthly can help you see how much progress you’re making. You can also review your spending and budget to look for any extra money you might be able to save, which is another way to maximize your plan.

What Is a Personal Savings Plan?

A personal savings plan is a plan for saving money that typically revolves around distinct financial goals. A comprehensive savings plan may include both short-term and long-term financial goals and is customized to your income, time horizon, and ability to save.

How Do You Make a Savings Plan?

Making a savings plan starts with creating a financial inventory, then setting clear financial goals. When you’ve done that, you can calculate what you can afford to save each month, how much to allocate to each savings plan goal, and where to keep your savings.

What Is a Good Savings Plan?

A good savings plan is one that allows you to identify which financial goals are most important to you, prioritize those goals, and achieve them in a time frame that you prefer. Every savings plan is different based on what you hope to achieve with your money, how long you have to save, and how much you can afford to commit to savings.

Read the original article on Investopedia.

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