While I’ve talked about Spending Plans, and how to rearrange them to accommodate your goals, I’ve not mentioned creating a Savings Plan. And when I say Savings Plan, I don’t mean buying things at a discount; I mean not buying things and putting the money aside to use later. Maybe to buy a house or a comfortable retirement. Something BIG like that.
Creating Your Savings Plan
Your savings plan is a combination of your foundation beliefs, goals, and an action plan to bring your goals to fruition.
Just like the spending plans, and in fact, my entire Holistic Personal Finance book, creating a Savings Plan starts with the future in mind.
- A Vision Statement to express what your ideal universe looks like and your place in it (five to ten-year time frame).
- A Mission Statement that expresses how you are going to achieve your vision (three-year time frame).
- Virtues that are both your guiding principles and decision-making framework.
- Annual Goal(s) that take you a little closer to that ideal universe every day.
And in the end, you’ll end up with something like the intention to save $x by the end of the year, probably starting with $y per pay.
Clearly, the best way to save money is not to spend it.
1. Pick Your Savings Account
Sometimes, you need a little help with the not spending side of things. The kind of help that comes from a savings account that makes it easy to get your money in, and a little difficult to get it out. Preferably with a higher interest rate, and lower fees than usual. You could open different accounts for each goal, but this will reduce your earning potential and probably increase your fees.
2. Compound Your Interest
When you credit the interest that you earn to the same account, you earn interest on your interest. It might not be a lot initially, but over time can add up, so where you have the option, credit it back to your Savings Account.
3. Pay Yourself First
Have your employer credit your savings directly to your savings account. For bonus savings, have your living costs deposited to your everyday account and the balance to your savings. This will ensure that any extra you get goes to savings before you see it.
4. Develop a Long-Term Strategy
Some savings, (that house deposit) take a really long time if you just keep depositing the same amount to the same account every time. You can accelerate your savings with a more strategic approach.
In the short term, you might decide to empty your pockets/purse of coins every night and deposit them into your savings account once a month. For the medium term, you might choose to have all your refunds, rebates and smaller income deposited directly into your savings instead of cheques in the mail.
Over the longer term, you’ll have a tidy sum in your savings account that could be earning higher interest with more stringent restrictions. That might be as simple as opening another account and agreeing not to withdraw from it for 30 days (or longer). Or as time passes, buying stock in a managed fund, or individual shares. When you feel comfortable with that.
5. Prepare to Invest
If you are saving for a “rainy day”, or have an audacious long-term goal, you may need to take more risk to achieve higher returns (when you are ready). This will be a terrifying prospect if you haven’t opened a savings account yet, so it’s important not to do any investing until you’ve educated yourself and are comfortable with the options available to you.
You may be inclined to rely on an investment advisor, but you do yourself a disservice if you blindly trust another human being with your life savings. It’s important to bear in mind that they may be advising you to buy products offering them commissions because it benefits them and not you, and that you bear ALL the risk.
Nothing is going to happen unless you make it. Often the biggest barrier to starting is not knowing where to start; by creating a savings plan, you give yourself a place to start.
Like all good plans, it’s not set in stone; it’s just a start. As your circumstances change, your goals will change too, so regardless of what your strategy is, you need to allow for some flexibility. For example, keeping some money in your savings account so that when fixing your broken down car becomes your highest priority, you can access it and avoid penalties for withdrawing before the funds become available.
Give yourself permission to make changes if you need to.