Saving money is central to achieving both short and long-term financial goals, such as building an emergency fund, start savings for a vacation, or putting aside money towards a down payment on a house. That said, sometimes the hardest thing about saving money is just getting started with it. In this guide, we explain how you can develop a simple and realistic strategy so that you can save for and hit your short and long-term goals.
Understand what a savings plan is
A savings plan is a method for amassing money in order to reach a specific financial goal. The savings plan lists all the goals in question and the steps that are needed to reach them. Some popular financial goals include:
- Emergency savings
- Vacation plans
- Wedding arrangements
- Buying a home
- Purchasing a vehicle
- Home repairs or improvements
- College and University planning
- Retirement savings
The types of financials that one includes in a savings plan will depend on their individual financial and life situation.
How to create a savings plan
Creating a personalized savings plan does not have to be a complicated endeavor. Below, we have listed a small checklist that can make the process easier.
Start with a financial inventory
Knowing where one stands financially can help determine a starting point for shaping a savings plan. Most investors should begin by creating some kind of financial inventory which is simply a list of any liquid assets and liabilities.
Current assets could include:
- Cash
- Checking account
- Savings account
- Money market account
- Certificate of deposit
- Individual retirement account
- Brokerage accounts
The above are assets that one could tap into for cash fairly quickly. They may also have other assets that are less liquid, such as houses or vehicles.
Liabilities could include:
- Credit card debt
- Student loans
- Car loan
- Mortgage
- Business loan
- Personal loan
- Medical bills
Subtracting the total liabilities from the total assets will give individuals their net worth.
Record expenses
Another great thing to do when planning on saving money is to figure out how much one spends. Keep track of all expenses, so aside from regular monthly bills, this also includes every cash tip, or item being bought. Expenses can be recorded traditionally through pencil and paper, a simple spreadsheet, or a spending app or tracker. Once a person has this data, organize the numbers by various categories, such as gas, groceries, and mortgage, and total the entire amount. This way, people can easily see their regular expenses, and what they can cut down on if necessary.
Establish any savings goals
Another step is to establish any savings goals, whether short-term or long-term. Short-term goals include things a person may need to save money for in the near term. For example, this may include saving for emergencies. Long-term goals on the other hand do not require immediate cash. Retirement and college are two major examples. In terms of the amount saved, long-term goals may be larger than short-term goals, but an individual has a longer time frame in which to execute their savings plan.
When setting financial goals, it is best for individuals to use the SMART formula:
- Specific
- Measurable
- Achievable
- Realistic
- Time-bound
For instance, rather than simply creating a vague goal like saving money for emergencies, individuals could set a SMART goal of saving $10,000 in 12 months. The goal is specific because there is a set dollar in mind and measurable because a person can track their progress from month to month. There is also a time element because they are giving themselves 12 months to reach it.
Whether the goal checks off achievable and realistic boxes can depend on how much money a person is able to save each month. This is where the next step in the savings plan process comes in.
Including saving in budget
A savings plan only works when a person is committed to it and has the money needed to save each month. Once a person knows how much they spend in a month, they can use this information to begin to create a budget. An individual’s budget should show the expenses relative to income so that they can plan their spending and limit overspending. Investors should make sure to factor in expenses that occur regularly but not every month, such as car maintenance. Also, include a savings category in a budget and aim to save an amount that initially feels comfortable. Plan on eventually increasing savings by up to 15 to 20% of an income.
Find ways to cut spending
Sometimes, it may be better to start cutting back on expenses. Investors should identify nonessentials, such as entertainment and eat out, that they can spend less on. Look for ways to save on any fixed monthly expenses, such as car insurance or cell phone plan. Other ideas for trimming everyday expenses include:
Search for free activities: Use resources, such as community event listings, to find free or low-cost entertainment.
Review recurring charges: Cancel subscriptions and memberships that are not being used, especially if they renew automatically.
Examine the cost of eating out versus cooking at home: Plan to eat most meals at home instead and research local restaurant deals for nights when looking for a treat.
Wait before buying: When tempted by a nonessential purchase, wait for a few days. This way investors may find that the item was something they wanted and not something they needed – and they can develop a plan to save for it.
Determine financial priorities
After all expenses and income, an investor’s goals are likely to have the biggest impact on how they allocate their savings. For instance, if an individual knows they are going to need to replace a car in the near future, they could start putting money away for one now. That said, be sure to remember any long-term goals, it is important that planning for retirement does not take a backseat to short-term needs. Learning how to prioritize their savings goals can give investors a clearer idea of how to allocate their savings.
Decide where to keep savings
When an investor has their goals in mind, they can think about where they wish to keep their funds. Some options include a savings account with a reputable brokerage firm – such as Saxo Markets, a money market account, a tax-advantaged account, or a taxable investment account, to name a few.
The option chosen will depend on the goal. For instance, if an investor is looking to save for emergencies, then their money needs to be easily accessible. At the same, they may want to earn a high rate of interest on their savings. Therefore, a high-yield savings account may be a good option.
On the other hand, online brokerage accounts can be used to invest money for both short-term and long-term goals. The catch is that if an investor sells assets in a brokerage account for a profit, they will owe capital gains tax.
Watch savings grow
Investors should make sure to review their budget and check their progress roughly every month. This will help them not only stick to their savings plan but also identify and fix problems quickly and efficiently. Understanding how to save money may even inspire an investor to find more ways to save and hit their goals faster.
