Do you need a savings plan? And how to make one?

Saving money is essential for achieving short- and long-term financial goals, like building an emergency fund, saving for a vacation, or setting aside money for a down payment on a house. In January 2022, the personal savings rate was 6.4%, meaning that the average US household saves less than 10% of their disposable income annually. Creating a savings plan can help increase your personal savings rate.

Understand a savings plan

A savings plan is a method of raising money to achieve specific financial goals. It lists the objectives in question and the steps necessary to achieve them. These goals may include:

• emergency savings
• Holiday projects
• Wedding arrangements
• To buy a house
• Home repairs or improvements
• Purchase of a vehicle
• college planning
• Pension saving

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

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 developing a savings plan. Start by creating a financial inventory, which is simply a list of your liquid assets and liabilities.

Assets could include:

These are assets that you could mine pretty quickly to get some cash. You may also have other less liquid assets, such as vehicles or homes.

Liabilities could include:

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

By subtracting your total liabilities from your total assets, you will get your net worth. According to Federal Reserve data, total household net worth reached $141.7 trillion in the second quarter of 2021. According to a 2019 Federal Reserve survey, the average net worth is around $748,000, while the median net worth is closer to $121,000.

Step 2: Set your savings goals

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

Long-term goals do not require immediate cash. Retirement and college are just two examples. In terms of the amount saved, long-term goals may be more important than short-term goals, but you have a longer time frame to execute your savings plan.

When setting financial goals for your savings plan, keep them SMART:

• Specific
• Measurable
• Feasible
• Realistic
• Limited in time

For example, rather than creating a vague goal like saving money for emergencies, you can set a SMART goal of saving $10,000 in 12 months. This goal is specific because you have a fixed amount in mind and measurable because you can track your progress from month to month. There is also a time element because you give yourself 12 months to achieve it.

Whether the goal ticks achievable and realistic boxes may depend on how much money you can save each month. This is where the next step in the savings plan process comes in.

Step 3: Decide how much to allocate to each goal

A savings plan only works if you commit to it and have money to save each month. If you have a monthly budget, you may already have an idea of ​​how much extra money you have to save each month. If you’re not a regular budgeter, you’ll first need to add up your income and subtract your expenses to figure out how much you can actually afford to save.

Take average household income and annual consumption expenditure as an example. According to the US Department of Labor’s Bureau of Labor Statistics, the typical household earned $84,352 in 2020. Meanwhile, the average household spent $61,334.

Using these numbers, the average monthly income comes out to $7,029. Average monthly expenses are $5,111. If your income and expenses match these numbers, you have about $1,918 left each month that you can apply to your savings plan.

Now suppose 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 timelines, here’s how your monthly savings should 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, which is $81 less than you need to meet your goals. The easiest way to make up the shortfall would be to review your budget and reduce your expenses to find $81 that you could redirect to savings. Accomplish this and your goal is achievable and realistic, as well as specific, measurable and time-bound.

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 may depend on the lens. For example, if you are saving for emergencies, your money should be easily accessible. At the same time, you may want to earn a high interest rate on your savings. Therefore, a high yield savings account might be the best option.

With retirement savings, you have the choice between a tax-advantaged account and a taxable account. Tax-advantaged accounts, such as a 401(k) or IRA, can provide tax benefits. They are designed for long term saving as you generally cannot withdraw money until age 59.5 without triggering an early withdrawal penalty.

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

Step 5: Maximize your savings plan

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

You can also maximize your savings plan by allocating windfall gains or unexpected amounts of money that come your way to one or more of your goals. For example, the average tax refund for 2021 was $2,775. If you usually get a tax refund, you can put that amount directly into your savings so there’s no temptation to spend it.

Reviewing your savings plan monthly can help you see the progress you are making. You can also review your expenses and budget to look for any extra money you could save, which is another way to maximize your plan.