What Is a Savings Plan?

What Is a Savings Plan?

A savings plan is a strategy for saving money to achieve personal financial goals, such as accumulating a down payment on a home, building an emergency fund or financing your retirement.

Your savings plan can include your goals, your budget, plans for reaching your goals and the places you'll save or invest your money. The more thorough you are with your savings plan, the more likely you'll be to stick to it.

Why Do You Need a Savings Plan?

Have you ever reached the end of the month and wondered where all your money went? Dinners out, impulse buys, drinks with friends—it's easy to overspend without thinking. Developing a savings plan helps ensure your money goes toward the things that matter most to you. By following your savings plan, you can feel confident about reaching your financial goals and avoiding spending and debt traps.

Learn more >> How Much Should You Save Each Month?

How to Create a Savings Plan

No two savings plans are the same. Here's how to make a savings plan that works for you.

1. Set Goals

Building an emergency fund and saving for retirement are important financial goals for everyone. They can help ensure you avoid debt when unexpected expenses arise and set aside enough money for your future. Here are some other things you might want to save for:

• A down payment on a new car
• A down payment on a house
• Rent and security deposits for an apartment
• A major home purchase such as a refrigerator or new furniture
• Home renovations
• Having or adopting a child
• A child's college education
• A wedding
• Adopting a pet
• One-time annual expenses, such as property taxes

2. Make a Budget

To create a budget, start by adding up your monthly income. Next, list your expenses, breaking them into essentials (such as rent, car payments and student loan payments) and discretionary expenses (such as meals out, streaming services and new clothes). Be sure to include irregular expenses, such as car registration, property taxes or insurance premiums, that are due once or twice a year.

One common budgeting method, the 50-30-20 rule, allocates 50% of your income to essentials, 30% to discretionary spending and 20% to savings, including retirement savings and paying down debt. If that's not realistic right now, aim to save 5% to 10% of your income—or whatever you can. If there's no wiggle room in your budget, look for ways to reduce your expenses, such as cutting back on nonessentials.

Learn more >> How to Stick to a Budget

3. Decide on Time Frames

You'll probably have a combination of short-, medium- and long-term financial goals. Listing them all out will help you allocate enough to each.

Short-term goals can generally be accomplished within one to two years. They might include:

• Buying a new sofa
• Building an emergency fund
• Paying for a vacation
• Paying for one-time annual expenses

Medium-term goals, which typically take three to seven years, might include:

• Having or adopting a child
• Making a down payment on a new car
• Making a down payment on a home
• Paying for home renovations

Long-term goals, which usually take 10 to 15 years or more, include:

• Saving for retirement
• Financing your child's college education
• Paying for your child's wedding

Once you decide how much money you need for each goal, review your budget to estimate how much you can put toward that goal and when you will reach it. It will likely take longer to save for a two-week European vacation than for a ski weekend at a local resort, for instance.

4. Find the Best Place for Your Savings

The ideal spot for your savings depends mostly on how soon you expect to need the money. Here are some options to consider.

Traditional savings accounts may be the first place you think of stashing savings, but there are other, likely better, options. High-yield savings accounts and money market accounts generally earn a higher rate of return than traditional savings accounts, while offering easy access to your money.

As of August 2024, the annual percentage yield (APY) for traditional savings accounts was just 0.46%. By comparison, the average APY on money market accounts was 0.64%, while some high-yield savings accounts earn north of 4%.

Learn more >> High-Yield Savings Account vs. Traditional Savings Account

Certificates of deposit (CDs) are savings vehicles that generally offer higher APYs than traditional savings accounts. Interest rates are typically guaranteed for the term of the CD, which usually lasts from a few months to five years. When the CD matures, you receive your initial deposit plus interest.

As of August 2024, 12-month CDs earned an average APY of 1.85%, but some CD APYs topped 5%. The tradeoff for higher returns: Withdrawing funds before the CD matures typically triggers an early withdrawal penalty. While you shouldn't lock your entire emergency fund into CDs, they can be ideal for medium-term savings goals like a home down payment.

Learn more >> How to Invest in CDs

Tax-advantaged retirement accounts can help you achieve your retirement savings goals. These accounts typically invest your savings in the stock market, which historically delivers higher returns than savings accounts over time. If you don't have an employer-sponsored 401(k) plan at work, you can open an individual retirement account (IRA).

You can save for your child's education with a 529 plan or Coverdell account. Tax-advantaged 529 plans, available from states and participating schools, let you save for tuition, room and board and other qualified costs of college, graduate school or K-12 tuition. Coverdell ESAs offer more investment choices than 529 plans, but contributions are capped at $2,000 annually.

Use a Savings Calculator

When choosing where to put your savings, consider APYs, minimum deposit and balance requirements, accessibility of funds, fees and any special features the account offers. The savings calculator below can help you compare options.

What Strategies Are Most Effective for Saving Money?

Try these tips for successful saving.

• Automate savings. You're less likely to spend money that never hits your checking account in the first place. That's why retirement plans typically deposit pretax money from your paycheck directly into your retirement account. You can automate savings in other ways. For example, some employers let you divide your payroll direct deposits among multiple savings and checking accounts. If your job doesn't allow this, you can typically schedule automatic transfers from your checking account to one or more savings accounts using your bank's mobile app or website.
• Be consistent. Don't get discouraged if you can only put aside a little bit of money each paycheck. Make saving a regular habit, like brushing your teeth, and you'll eventually see results.
• Make a game of it. A savings challenge can make saving money more fun. Try a no-spend challenge by going a weekend, week or even a month with no discretionary spending.
• Look for ways to save. As your savings grow, keep an eye out for ways to reduce unnecessary spending so you can save even more. For example, can you cancel unused subscriptions and memberships or cut back on utility use? Buying generic products, looking for discounts and coupons, eating out less often and resisting impulse purchases can leave more money in your pocket.
• Comparison shop. Regularly compare rates for home or renters insurance and auto insurance to see if you can find lower prices and put the savings toward your savings plan. You may be able to negotiate lower bills for your internet and phone service too.
• Hold yourself accountable. Pairing with friends as accountability partners can help you stick to your savings plan. You can also download an accountability app to reinforce positive savings habits.
• Take advantage of employer matching. Some employers match the amount you contribute to your 401(k) plan up to a percentage of your pretax annual wages. Contribute at least enough to max out any employer match; otherwise, you're missing out on free money.
• Put windfalls toward savings. Put one-off income such as a tax refund, bonus at work or cash gift from Grandma towards your savings.
• Fight lifestyle creep. It's tempting to spend more after getting a raise. Funnel half of the increased income into your savings accounts instead.
• Make more money. Reach your savings goals faster by asking for extra shifts at work, getting a better-paying job or seeking a promotion. Another option: Start a side hustle, such as delivery driving, tutoring or selling items online, in your spare time.

Learn more >> Simple Ways to Save Money

The Bottom Line

Sticking to your savings plan can give you the financial freedom to do the things you want without worrying about how to pay for them. Maintaining good credit is another way to expand your financial options. A good credit score can make it easier to access loans and credit at lower interest rates.

Make it a habit to check your credit report and credit score regularly. To automate this just like you automate your savings plan, consider signing up for Experian's free credit monitoring service. You'll receive alerts about important changes in your Experian credit report and suspicious activity that could indicate fraud.