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How to create and benefit from a savings plan
Trying to make smarter spending decisions? Savings plans give structure to finances, enabling short- and long-term planning with effective budgeting.
This article dives into what a savings plan is, how to build one, potential benefits, and answers to frequently asked questions.
What is a savings plan?
A savings plan is a blueprint for saving money that helps people make financial decisions and reach financial goals. Savings plans give structure to day-to-day spending, tracking incomings and outgoings while minimizing unimportant purchases.
A savings plan works together with a savings account — which is a place to put money away and build wealth over time. A high-yield savings account, like PayPal Savings1, can also offer compound interest with a beneficial annual percentage yield (APY), helping boost financial growth.
Types of savings plans
Different savings plans can be tailored for specific goals and may include the following types of funds:
- Emergency fund. Additional savings kept for unexpected bills or expenses can be deposited into an emergency fund.
- Retirement savings. These funds are saved over longer periods of time to use at retirement age.
- Education fund. Money for educational expenses, such as college or university tuition, fall into this bucket.
- Vacation fund. A vacation fund could include savings for a dream holiday, family reunion, or big-ticket getaway.
- Slush fund. This miscellaneous savings fund can be used for any desired purpose.
When a savings account is designed for a specific goal or expense, it may also be known as a sinking fund. Use savings apps to help savings plans and sinking funds stay on track.
How to build an effective savings plan
Consider these tips when building a savings plan:
- S.M.A.R.T. goals. Setting "smart" goals for a savings plan can help reach milestones effectively. S.M.A.R.T. refers to outcomes that are specific, measurable, achievable, relevant, and time bound.
- Realistic budgeting. Creating a strong budget can helps to track and manage income and expenses efficiently. There are many ways to do this; a common strategy is the 50/30/20 rule: putting 50% of income toward needs, 30% toward wants, and 20% toward savings.
- Automated transfers. Setting up recurring transfers to a savings account can help automate savings and ensure consistency over time.
- Cutting expenses. Identifying non-essential expenses helps cut additional costs that can be redirected to savings.
- Using financial apps. Apps and digital financial tools can help manage subscriptions, pay bills on time, as well as assist with expense tracking.
Potential savings plan benefits
Some of the potential benefits of a savings plan are:
- Financial security. A savings plan can function as a security blanket, providing day-to-day financial backing.
- Achieving goals. Savings plans help to achieve long- and short-term financial goals.
- Peace of mind. Having extra funds on hand may help alleviate stress, knowing that unexpected financial challenges can be met.
- Financial freedom. Well-structured savings plans may benefit the ability to try new activities and ventures, with possible financial risk offset by a firm safety net.
Possible savings plan challenges
There are potential challenges that come with savings plans. These may include:
- Staying motivated to save. A savings plan can feel difficult to accomplish if motivation or incentive is low, or goals feel overwhelming.
- Surprise expenses. Costs that come out of the blue can dent the flow of a savings plan and further impact motivation.
- Slow progress. Building up savings can take time and it’s possible to become demotivated. It’s important to stay the course and remain focused on individual goals.
- Life changes. Changing life circumstances can impact financial situations and cause plans to change.
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Savings plan strategies
Unexpected costs and household expenses are a part of life. But it’s possible to both plan for and handle them without a savings plan being derailed. Consider these financial discipline tips to help avoid unnecessary spending and stay on track:
- Check on progress regularly (weekly, monthly, etc.)
- Manage expectations
- Use patience and determination
- Have a clear vision on goals and end points
- Budget for fun and entertainment, too
Monitoring and adjusting a savings plan
It’s essential to review a savings plan at regular intervals. Monitoring progress further helps to make easy adjustments should any personal financial situations change.
Personal finance software and budgeting apps can also help individuals stay motivated and on track to meet savings goals.
Savings plans are an essential part of a broader approach to financial health, helping provide a personal safety net and a pathway to achieving important financial goals.
Learn about PayPal Savings.