How to Create A Savings Plan in 5 Easy Steps

How to Create a Savings Plan

Learning how to create a savings plan is a significant step in your financial journey. Anyone can earn money, but managing how you save that money is your key to building generational wealth. 

By creating a savings plan, you can outline what you want to save for, how much you’d like to save, and at what rate. But we’ll get to all of that later. First, let’s discuss what a savings plan actually is.

What is a savings plan?

If you’ve ever asked yourself this question, then you’ve come to the right place. 

The concept of saving is great in theory, but how do we put that into practice in a way that will work for people at all income levels? 

Over the years, I have had many people I’ve coached tell me they don’t feel like they’re in a position to save because they simply don’t make enough money. 

Well, that’s understandable. But, where there’s a will, there’s a way. Which is why I came up with this 5 step plan that will help anyone create a savings plan that works at any income level.

1. Determine What You should save for

What Should You Save For

The first step in this process is to determine what you want to save for. This is a critical step in learning how to create a savings plan and one in which you’ll need to be specific. Depending on where you are in your financial journey, you may need to save for very different things. 

Understandably, figuring out what you want to save for can feel overwhelming, especially when you’re thinking in terms of building generational wealth.

But, don’t let that stop you from being specific about your savings goals. Here are a few suggestions on where to start building your savings.

Rainy Day Fund – first $1000

According to a study done by bankrate.com, only 40% of respondents said they would be able to cover an emergency expense of $1000 or more. 

Let’s put that into perspective. The average auto repair costs about $500, according to a study by AAA. The average HVAC repair costs between $150 and $450, and the average plumbing repair cost can range from $175-$450, according to Home Advisor

So, what would happen if 60% of survey respondents mentioned above had all these emergencies in one month? Yup, you guessed it. They may not be able to cover the cost of each emergency. They’d either have to wait to make the repairs or pay for the expense with debt.

emergency fund

Similar to saving your first $1000 for emergencies, building a larger emergency fund can help protect against long-term emergencies like job loss. Typically, an emergency fund would be large enough to cover between 3-6 months of expenses if you lose your income for that amount of time.

Save for Retirement Early

Retirement

Saving for retirement is non-negotiable AND you should consider starting early. The earlier, the better. Remember, you don’t have to break the bank doing it. By starting early, you can take advantage of compounded interest – your best friend when saving – and easily retire a millionaire with just $100!

Large Purchases

Saving for large purchases will prove to be critical as you move throughout your financial journey. Some large expenses will be emergencies and therefore covered by your emergency fund. However, many others will require a separate fund either due to the size of the balance or its importance. Some examples of large purchases you may need to save for include a down payment on a house, a car, major home repairs, or home remodeling, to name a few.

College fund

Saving for a College Fund

Let’s face it, if you have kids, at some point, you’ll have to consider the expense of higher education. For many families, this can be a major expense to consider. There are a couple of ways you can consider saving for your child’s college fund. 

One way you could start saving is with a 529 college savings plan. These plans are a tax-advantaged way to save for college or other future education costs. You can learn more about the details of these plans here.

Another option to consider is a custodial account. Custodial accounts offer a bit more flexibility when covering your child’s expenditures, but they don’t have the same tax advantages as 529 plans. Aside from increased flexibility, opening a custodial account can initiate the transfer of generational wealth to your kids in more ways than one. I discuss this further here.

Sinking Fund

Think of a sinking fund as your play money. Want to take a last-minute weekend trip whenever you feel like it? Start putting money into a sinking fund to cover it. Want to treat yourself to a new pair of shoes? Build that money into a sinking fund, and when those shoes go on sale, snatch them up! 

As you can see, a sinking fund can serve multiple purposes, but the most beneficial is that you have the ability to treat yourself for your hard work staying on track with your financial goals guilt-free.

Whether you’re saving to build your emergency fund, to buy a home, for school, or whatever the case may be, you have to explicitly identify your savings goals in order to create an action plan.

2. Establish a Savings Amount

How much should you save

Based on the goals you will have defined, you’ll understand how much money you’d like to save once you’ve reached this step. In the beginning, you’ll want to start with a smaller goal. Something that, when reached, will help boost your confidence toward saving. 

For example, if you have no money saved and you feel the need to create a small “rainy day” fund (different from an emergency fund), set a goal to save $100. Once you’ve saved that first $100, set another larger goal, then keep the momentum going.

3. Decide on a Savings Timeline

Once you’ve identified the amount you’d like to save, then decide on a timeline to achieve that goal. Because YOU are setting these goals, you will have a lot of flexibility in creating this timeline, so make it realistic. 

The worst thing you could do when defining your savings timeline is to convince yourself that you can save your target amount in a shorter time than is realistic. Not only do you run the risk of not achieving the goal because it may have been too aggressive to start, but you also run the risk of losing confidence in your ability to save.

4. Calculate Your Savings Rate

Determining and understanding your savings rate is simple but also very important when you create a savings plan. This enables you to understand the percentage of your income allocated toward savings. 

Why is that important? 

Well, let’s compare the two people below. Person A makes $30,000 a year but has a savings rate of 17%, while Person B makes $100,000 a year but only has a 5% savings rate.

Savings Rate

The point of this comparison is to show you that the savings amount itself, while necessary for setting goals, is not the only amount to consider. 

If Person A can maintain their 17% savings rate when their salary increases to $100,000, they could be saving almost $17,000 instead of $5,000 annually ($100,000*(1+17%))! 

By maintaining your savings rate, as your income increases, you can boost your savings amount without the need to allocate a higher percentage of your income toward savings. 

In other words, you likely won’t “feel” the increase in the dollar amount as much. This concept will help set the stage for consistent financial growth.

5. Choose your Savings Methods

There are many different ways to save, and selecting your methods of saving is determined mainly by your actual savings goal. 

If your goal is to save for retirement, typically you’d start by contributing to a retirement account like a 401k/403b or in an IRA. If you’re looking to build a small “rainy day” fund, you’d likely use a savings account at your bank or credit union. 

The chart below shows some pros and cons of a few well-known methods for saving.

Savings Methods

Different methods can be used to amplify your savings. You’ll need to identify the savings method that matches your specific savings goals best.

Wrap Up

Overall, saving money for your future is an invaluable stage in your financial journey. When you create a savings plan, and executing it well, you will be one step closer to building generational wealth. 

No matter your income level or where you are in your financial journey, if you have the desire to save, you can still make it happen. It may take longer, or require a lot of sacrifices, but with the right tools, knowledge, and determination your dreams of saving money can undoubtedly become a reality.

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Krystal Norwood-Morales, MBA, CFEI

Krystal is a Certified Financial Education Instructor and founder of Wild About Wealth, LLC. As a financial literacy advocate, she writes posts geared toward helping others improve their financial education and build generational wealth.

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Krystal Norwood-Morales, MBA, CFEI

Personal finance blogger

As a certified financial education instructor and financial literacy advocate, my mission is to teach young adults how to build generational through financial education. So let’s get WILD about WEALTH!

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