There's no better feeling than when your direct deposit hits and you can think of all the ways you could spend that cash. And while there's something to be said for enjoying the fruits of your labor, having a savings plan in place is one of the best moves you can make for your money. Here's what you need to know about why you need a savings plan.
Table of contents
- Why do you need a savings plan?
- Benefits of having a savings plan
- Consequences of not having a savings plan
- How to build a good savings plan
- Tips for successful saving
- Savings plan FAQs
Why do you need a savings plan?
A savings plan is a method for saving money that ensures you'll have it when you need it most. Whether it's for a medical or personal emergency or just to save up for a down payment for a house, having a budget plan that emphasizes savings can help you achieve goals, deal with setbacks and avoid debt.
Benefits of having a savings plan
There are many benefits of having a savings plan. Accumulating wealth and creating a safety net for yourself can help you avoid tricky financial situations and aid in reaching your goals. Consider the following benefits while making decisions about your savings plan.
The confidence in knowing that you've already got your rent and groceries covered is the most basic feeling of financial security. Once you build up an emergency fund of three to six months, you'll feel more secure if you were to be injured and out of work or laid off. Additionally, once you start regularly contributing to retirement savings, you'll feel more secure about the financial stability of your future.
Having enough cash in the bank to cover the things you need to buy unexpectedly or at a high cost can help you reduce the amount of debt you take on. While it may not be possible to avoid all types of financing, reducing things like credit card debt and personal loan debt should be a key strategy to building up your savings. Making purchases from your savings instead of credit will save you money over the long term as you won't have to pay interest fees.
Better credit score
While the amount of money in your savings account doesn't directly impact your credit score, savings helps you avoid debt in emergencies. The less debt you are forced to take on by circumstance, the better your credit score can be.
A savings plan can help make a plan for your life as well. Financial freedom means having enough money to do things you want to do. When you have the choice to take time off from work, make a career change or even retire early thanks to the savings you have built up, you're experiencing the benefits of financial freedom.
Consequences of not having a savings plan
Not building up your savings may come with negative consequences. These may be related to unforeseen struggles or simply limitations put in place by a lack of available cash. Consider the following consequences of not saving enough.
Financial instability is a sense of not knowing if you're going to have enough money when you need it. This is often known as living paycheck to paycheck. Financial instability may be marked by juggling which bills to pay or paying bills late on occasion. Having a savings plan can help prevent this.
When you don't have enough money to pay for what you need, you are more likely to take on debt. This may include things like credit card debt, which can grow as interest accrues, or car loans, which have a fixed payment but ultimately cost you more than saving up and paying for a car in cash.
Limited financial options
Without enough savings behind you, your financial options can be limited. For example, if you can only make a small down payment on a car, your auto loan rate may be higher. Similarly, if you don't have enough money saved up for first, last and security payments on a new apartment, you may not be able to rent that living space you really wanted.
Not being ready for retirement
The common saying "Retirement isn't an age, it's a financial number" hints to an important consequence of not having a savings plan: if you don't have enough money to hit that number, you may have to hold off on retirement until you do.
How to build a good savings plan
Here are six steps to building a good savings plan:
1. Assess your financial situation
To build a good savings plan, start by taking an honest look at your financial situation. Identify how much you make and what your expenses are. See if there are costs you can cut. Calculate how much surplus money you have left that could be saved.
2. Set savings goals
Setting a goal for your savings can make your plan more attainable. Consider setting goals like, "I'd like to save $1,000 by my birthday," or "I'm going to pay cash for this year's summer vacation."
If you've had trouble sticking to goals in the past, get S.M.A.R.T. about it by using this goal-setting system for making your goals achievable one step at a time. Consider these examples:
- Specific: I'd like to save $2,000 for a car.
- Measurable: I'd need to save $100 from each paycheck to reach my goal.
- Achievable: I have an excess of at least $100 from each paycheck.
- Realistic: I can spare $2,000 for a down payment on a car.
- Time-measured: I want to save this down payment in five months
3. Create a budget
Create a budget that supports your savings plan. A budget is a way to calibrate the money you have coming in with the money you have going out. When you increase the gap between the money you earn and the money you spend, you've got more money that is available for saving.
4. Choose the right savings account
Compare a variety of savings accounts to see which is the best to use for your new savings plan. Weigh the benefits of a CD vs a savings account or consider opening a money market account. Remember to compare interest rates, accessibility and costs associated with these potential accounts.
|Type of account||Interest rate||Minimum balance||Withdrawal restrictions||Fees|
|Regular Savings Account||Lower interest rate, with average around 0.42% per the FDIC||May require a minimum balance||Can withdraw as needed as long as you don't go below stated minimum balance||ATM fees, overdraft fees, maintenance fees |
No-fee accounts are available
|High-Yield Savings Account||Higher interest rate, fluctuates with economic climate||May require a minimum balance||Can withdraw as needed as long as you don't go below minimum balance||No-fee accounts are available|
|Money Market Account||Lower interest rate, with average around 0.61% per the FDIC||May require a higher minimum balance than a typical savings account||May have limit on how many checks you write each month||No-fee accounts are available|
|Certificate of Deposit||CD rates depends on length of CD and may range from 0.25%-1.5%||May require a higher minimum balance than a typical savings account||Early withdrawal penalties||No-fee accounts are available|
5. Make a savings plan
Once you have reviewed your situation, set S.M.A.R.T. goals, created a budget and chosen a savings account, it's time to actually make a plan to save. Decide on the steps you will take to save, such as setting up automatic transfers from your paycheck to a savings account.
6. Track your progress
Stay committed to your savings plan by tracking your progress. You can use old-fashioned pen and paper accounting books, or check out the best budget-tracking apps. Your bank may even have integrated savings tracking features in their mobile banking app.
Tips for successful saving
Successful saving may require changing some of your habits around money. Once you adjust the way you have been handling your income, you may start to see the benefits of a successful saving plan.
Automating your savings
Automating your savings means taking advantage of a particular financial tool to make saving money easier. One way to do so is to request that part of your paycheck be directly deposited into a separate savings account. This can help reduce your temptation to spend savings.
The best high-yield savings accounts may also have integrated automated savings functions. These may be similar to cash-based envelope savings systems and allow you to earmark particular amounts for specific savings goals.
It's easier to save money when you're spending less. Cutting expenses can be a big boost to your savings plan. One of your first steps when creating a budget may be to look for places to reduce spending.
Making saving a habit
Making saving a routine habit helps to increase the amount you save. Financial mindfulness and routine are a great way to up your savings game, so make a practice of immediately moving part of your paycheck into a savings account. By making this manual transfer part of your financial habits, you'll internalize a savings mindset.
Savings plan FAQs
What are some common mistakes people make when it comes to saving?
There are three common mistakes people make when it comes to saving. The first one is not saving enough. At a minimum, consider saving an emergency fund of readily accessible cash that could cover your living expenses for three to six months.
The second mistake is saving at the expense of investing. Once you have enough cash on hand to cover emergencies and fund your lifestyle, consider investing. Keeping too much money in a savings account when you could be earning money for your retirement in an investment account could be a costly mistake down the road.
Lastly, the third most common mistake people make when creating a savings plan is leaving their savings in a regular savings account. A typical bank account pays less than 1% in interest. But you could keep your savings in an equally accessible high-yield savings account with a debit card and online transfer and earn an average of 4% in interest.
How does a savings plan differ from an investment plan?
A savings plan is a place where you can easily store money and keep it accessible for when you need it quickly. You may earn some interest on it, but it is likely not enough to live on. This savings is generally in a short-term account, like a high-yield savings account or certificate of deposit that lasts up to five years.
Comparatively, an investment plan is for money you invest into things like stocks and bonds. This is money that you may not be able to withdraw without penalty, such as from a 401(k). You likely intend to live off the interest this account earns after you retire.
What tools can I use to make saving easier and more effective?
There are many financial tools that can help make savings easier and more effective. Consider the following:
- Budget apps: Track your spending and your budget success with an app tailored to your goals.
- Cash envelopes: Use the cash envelope budget system to portion out your spending money for the month and stay on track.
- Separate savings account at a second bank: Stash cash at a second institution so it's not easily available.
What are some ways to measure the success of a savings plan?
You can measure the success of your savings plan both objectively and subjectively.
Objectively, you see positive growth in your savings account. Depending on how detailed your savings plan was, you may want to see particular totals by certain dates. Measuring this growth over several months can help you feel successful about your savings plan.
Subjectively, you will feel more confident about your financial stability and your ability to cope with sudden expenses while achieving your financial goals.