How to Create a Savings Plan
1. Look into an Employee Savings Plan
Saving a small amount of money per month, directly from your paycheck is an easy way to get started. Even if you only elect to save a small percentage of your salary, many companies offer a match on a percentage that you choose to save.
If you are making $60,000 and elect to save 3% of your salary into your 401(k), you will contribute $1800 for the year. If your company matches your salary deferrals, they will also contribute $1800/year to your 401(k). Without choosing any investments, you have already earned a 100% return on your money. There is no better way to save than to take full advantage of your company retirement benefits.
2. Identify Spending Habits
Review your last few months of expenses. Estimate how much you spend on food, entertainment, travel, etc. and figure out the average spending for a month. Saving money each month doesn’t necessarily mean you need to cut back your discretionary spending. Many times people find there is room for both. Looking at your “top-down” budget reviews what you spend month-to-month, compared to a “bottom-up” budget which allows for a certain dollar amount to be spent in certain categories in a month. The top-down version is much more realistic; people tend to underestimate how much they spend in certain areas. Once you have an idea of your spending habits, you may find there is some room to carve out a small amount of money to be put into savings. Eventually, you will come to think of this savings as another bill you have to pay—you pay for gas, you buy lunch every day, you put $300/month into savings.
3. Automate. Automate. Automate.
Set up your savings to automatically be deposited. It’s one less thing to worry about during the month and you will be much more inclined to stick with it if you don’t have to think about it.
4. Be Smart About Your Debt
If you have any credit card debt or college loans at high interest rates, have a plan for paying these items down first. Can you transfer your credit card debt to a 0% interest rate card? Is there a way to refinance your student loans so you pay less interest over the long run? If you own a home, you may be able to take out a Home Equity Line of Credit with a much more favorable rate of interest than your credit cards or student loans.
5. Get Started Early
The earlier you can get started with an investment plan, the better. Consider two investors, Emily and Dave. Emily starts investing at age 25, saving $200/month into a retirement account with a 6% rate of return. Dave starts saving $200/month at age 35, 10 years after Emily. They both continue to save $200/month until they retire at age 65. During those 40 years, Emily saved $96,000 of her own money. Dave saved $72,000 over 30 years. But, by the time they are both 65, Emily has accumulated $400,289 and Dave has $201,907. The extra 10 years of compounding interest made a huge difference by the time they reached retirement.
Start Saving for a Brighter Tomorrow
As we embark upon a new year, now is as good a time as any to establish a clear path to building your savings. Getting yourself organized and staying diligent with your savings plan will help you to work towards your long-term financial goals. Whether you wish to buy a house, fund a 529 Plan, Build your retirement nest-egg or donate to charity, it all starts with a sound budget, smart savings habits, and a good plan.
Need help creating a financial plan? Schedule a discovery call with one of our advisors to pave a path towards a brighter tomorrow.