3 Steps To Creating A Savings Plan
How do I create a savings plan- that I’ll actually use?
Creating a savings plan can feel like a dance. You put money into savings and take a step forward in your finances. You get hit with a “surprise” expense, and you take a step back in your finances. It can feel discouraging and frustrating.
Don’t lose hope! There IS a way to build savings, even when hit with unexpected expenses. The key to creating a successful savings plan is realizing that most of your “surprise” expenses are really unplanned known expenses (just because you hope it doesn’t happen doesn’t make it a surprise).
TO CREATE A SUCCESSFUL SAVINGS PLAN THAT CAN SURVIVE THE "FINANCIAL ROLLERCOASTER OF LIFE", FOLLOW THESE STEPS SO YOU CAN PLAN FOR THE:
“Shoot I Forgot” Expenses- Sinking Fund
“What the Hell” expenses- Emergency Fund
How to “Just Get Started”- Implementation Plan
#1-PLAN FOR THE "SHOOT I FORGOT' EXPENSES- SINKING FUND
How many times have you used a credit card to pay for an expense you knew was coming, but you didn’t have the money to pay for it? A sinking fund solves this problem. A sinking fund is a line item in your budget you use to save for upcoming known expenses each month.
The sinking fund’s goal is to prevent a known, unplanned event from becoming a future credit card bill.
Example: If you want to have $600 for Christmas gifts in 10 months, your goal will be to save $60 a month for the next ten months:
$60 a month X 10 months= $600 for gifts ( and no credit bill to follow you into the new year)
Even if you aren’t sure of the exact amount, you can estimate the amount needed to reach your savings goal. Either go online and estimate costs or look up what you paid for the item last year.
You can save the funds in your existing checking account or create accounts for various sinking funds. You can create accounts for vacations, gifts, or future large purchases like appliances or furniture.
Below are a few types of expenses that may fall under a sinking fund:
Auto maintenance/minor repairs:
If you own a vehicle, you’ll have auto maintenance and car repair bills. At some point, you will probably have your vehicle’s tires rotated, oil changes, transmission flushes, replacement of parts, and scheduled maintenance. None of these expenses should be a shock, so why should they be a shock to your bank account?
AAA Car Repair Estimates has a fantastic vehicle repair estimate tool that helps you figure out the cost of several different types of repairs.
Home maintenance/repairs:
If you own a house, you’ll have maintenance costs and likely need something repaired. You may need annual termite inspections, a chimney inspection, or an HVAC check-up.
A general rule of thumb is to save about 1%-4% of your home’s value for home maintenance/repair expenses. This number can be higher or lower depending on the age of your home, appliances, warranties, and a variety of other factors.
Vacations:
Most people don’t accidentally wake up on vacation. You had to do some work to book your lodgings, plan activities and let your boss know about your vacation.
In most cases, the planning happens a few months before the vacation date- enough time to estimate the vacation’s total cost and you start saving for the vacation.
Gifts:
OK, if you’ve ever done the “Mother’s Store Run Of Shame”(guilty), just say amen. This is running around like a chicken-with-you-head-cut off because you forgot to plan your kid’s birthday party. Because you’re planning at the last minute, you also spend twice as much money.
Events like birthdays, Mother’s Day, Father’s Day, and Christmas should not be budget busters when you know when the events will happen every year.
Review past spending to estimate how much to start saving each month to cover the costs.
Future purchases:
Aside from known expenses, you may have goals you want to save for, such as:
A car
A down payment for a home
Upgrading appliances
New furniture
#2-PLAN FOR THE "WHAT THE HELL" EXPENSES- EMERGENCY FUND
An emergency savings account is for truly unexpected significant expenses. These expenses are primarily due to life events we hope never happen but realistically know they’re likely to happen.
A study by Pew Charitable Trust cited that 60% of households experienced one or more of the following expenses in 12 months:
Change in income
Medical Emergency
Major Car Repair
Major Home Repair
A rule of thumb is to save at least three months of your expenses for emergencies. You can also add in the following insurance deductible amounts to your savings:
Car Deductible
Homeowner Insurance Deductible
Medical Insurance Deductible (if you aren’t saving for medical expenses in a pre-tax medical savings account)
Saving money for emergencies prevents an unexpected expense from turning into a 401k withdrawal. An emergency savings account can help you get and stay debt-free when life gets crazy and keep your retirement savings intact.
#3-PLAN FOR HOW TO "JUST GET STARTED"-IMPLEMENTATION PLAN
ADD SAVINGS TO BUDGET
Start adding in both sinking fund savings and emergency savings items in your budget. Even if you can’t fund it right now, adding the items to your budget keeps it top of mind.
START LOW
Start with an amount LOWER than you think you can afford to commit to saving monthly. Put a reminder on your calendar to review in three months. If after three months you save with ease, increase your monthly savings amount.
BE CONSISTENT
Commit to saving monthly no matter what. There will be times you can save your goal amount, and there will be times when you can only save a few dollars. Even if it’s $5, it’s $5 more than you had the week before. Creating the habit of saving is what increases savings. You will naturally start saving more.
HAVE A WINDFALL PLAN
A windfall is getting unexpected money. Whether we realize it or not, we get windfalls often, even if it’s small. Paying less than expected for something is extra money that can go towards a sinking fund item. A refund or a bonus is extra money for savings. No matter how small the amount, commit any unexpected funds to one or more of your savings goals.
LOOK FOR EASY WAYS TO SAVINGS
Look for quick, easy ways to save. A reduction in your cable bill or cell phone bills is extra money to put towards savings. Eating out one less time a week is an extra money for savings. Look for the small things you can change to increase the amount you can put towards savings- even if it’s a $5 change.
AUTOMATE
You have enough to think about; make savings as easy as possible. Deduct the amount you want to save automatically from your paycheck. Or you can schedule automatic transfers from your checking to savings accounts. You can also create a recurring monthly or biweekly calendar reminder to save a certain amount of money.
CREATE BOUNDARIES
If you worry about reading your savings, create ways to make it harder. “Hide” your savings account from the summary online view. If you don’t see your savings account when you first view your accounts, you’re less likely to raid. Another option is to open a savings account at a different bank.
BE FORGIVING- OF YOURSELF
If you are new to thinking about saving in this way, it’s going to take time. You may only be able to save for one or two categories right now, and that’s OK. The longer you save, the better you get at savings.
SUMMARY
Creating a successful saving plan is all about thinking and planning for:
“Shoot I Forgot” Expenses- Sinking Fund
“What the Hell” expenses- Emergency Fund
“How To Just Get Started”- Implementation Plan
Savings is a core financial foundation needed to build a life you love. A savings account turns an unexpected event into an inconvenience vs. a crisis. Savings must become a consistent habit, to the point where you treat it like a bill.
NEXT STEPS
Start to create a successful savings plan by working on one step a week.
Pick the day and time you can work on your savings plan and schedule it as a recurring event.
If you forget or lose motivation, the reminder pops up to “guilt” you into doing a step.
Before you know it, you will have a savings plan that can withstand life’s financial storms.
