Preparing A Savings Plan

Preparing a savings plan is much like planning a trip. You are at point “A” and you want to get to point “B”. Maybe you'll wish to visit points “C” and “D” also.

Before you set out, you select a route or routes that will get you there either most quickly, usually sacrificing comfort for speed, or the best way for your style of travel. A savings plan is very similar. You can devise a plan that will get you there the most quickly and usually with the greatest sacrifice, or you can prepare a savings plan that will eventually get to the same point but allow you to give up less.

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It comes down to setting goals, goals that are achievable given your financial situation. It certainly doesn’t make sense to decide that you wish to have $100,000 stashed away by the time you are 50 by only putting $100 a month in a plan that pays 5% per annum. That could happen only if you start saving at 12 years old.

By the same token what good will it do you to save $300 a month if you have to borrow or use a credit card to meet other monthly obligations.

Realistic savings plans, plans that are not an additional financial burden, are the only savings plans which work in the long run. Modest amounts, put away over long periods of time, even at interest rates of 5 - 6%, will build to substantial amounts. This tactic, while containing a bit more risk than a bank savings account, can pay double, even triple, the interest rate. It is easy to see where larger amounts invested at much better rates will increase the earnings of an account dramatically in only a few years. 

Why is a savings plan so important? Simple, we can not predict the future with any accuracy. We cannot foresee unexpected expenses. We aren't certain as to whether our retirement plans will be enough to last out an expected lifetime, and we never know when an emergency, especially a medical emergency that involves huge expense, will happen. Basically, a saving plan is another insurance plan, one that we must maintain as any other needed insurance plan.

Also, a savings plan is an important part of our overall financial profile, a very important aspect when it comes to credit, credit ratings and borrowing power.

The most common reaction many people have when presented with the idea of creating a financial plan, is, "I can barely make ends meet. How can I ever expect to save?"

The first step to building a solid secure financial future is to work out a cash flow appraisal and a spending plan. You can never succeed at building anything unless you know what materials you have to work with. You absolutely must know how much you have coming in and how much you have going out. And, you should include a projected amount for saving in your budget. The practice of itemizing bills, including your savings as any other expense, is called paying yourself first.

Almost every financial advisor will tell you that ideally you should save a minimum of 10% of your gross income. That amount may be unrealistic for many and impossible for some. However, almost every person earning a wage or paycheck can probably save some amount. The amount isn't as important as getting started. Good habits are hard to form, but just like bad habits, they are hard to break. A habit of salting away the least little amount on a regular basis is a great habit.

Some may find that after working out that spending plan, expenses actually exceed income. Even as dire as that may seem, it is a situation that can be overcome without taking on another job or earning task. How? By searching for ways to cut spending. Many times this is far easier than finding additional income opportunities and frequently isn't as difficult as it may seem. Little things like renting a video the entire family can watch for $4 as opposed to spending $25, $30, or more to take the family to a movie will make a significant difference over time. Arranging errands so many can be run during the same outing will save hundreds of dollars over the course of a year. Dropping comprehensive insurance on older cars will also add up to considerable savings over time. Reducing the number of cable channels may save $50 a month. That extra savings of $50 a month can add up to $30,000 in just twenty-five years, even if earning only 5% per year.

The best way to begin saving is to make certain you pay yourself first every time you get paid. One easy way to do this is to have an automatic deduction taken from your paycheck and placed directly into your savings account. This is doubly effective: money you never see is easier to let go of, and you'll feel like you're working for more than paying bills.

There may come a time when you will have to dip into that savings account to pay an unforeseen bill, or there may be weeks when you just can't give up that 10%. Instead of letting this discourage you and worrying about making up the loss to your savings, make an effort to get back into that good habit of saving with your very next paycheck. Plan to catch up gradually, over the next several months or years. An increase to only 11% over time may be enough to get you back to where you were.

The most important thing in deciding on a responsible savings plan is consistency. Stay with your plan. There is great peace of mind knowing you have money in the bank.

Remember, as they say, "A penny saved is a penny earned!"