Savings plan is a financial strategy for the consolidation of funds that can be used for personal goals or investment vehicles in order to obtain benefits in the medium or long term.
Do you want to reach a big financial goal? Are you overwhelmed just thinking about how much money you need to save to reach your goal?
Savings are a very important part of financial management. With many economists who argue that saving precedes investment, it is vital that you have a savings plan structured over time so that you can finance future investments, unforeseen expenses and thus design the lifestyle you want, supporting your project of lifetime.
With solid savings you can start generating passive income through various financial instruments in the stock markets, futures markets, currency markets and cryptocurrencies or simply allocate the money to a great project or dream like a house, the dream trip of your life or whatever you want to do.
In this guide we will show the steps necessary to build a truly effective and sustainable savings plan over time to prepare any type of investment you wish to make.
Start your Savings Plan
To begin with, you need to understand that you are not going to achieve big financial goals overnight. You need a savings plan to break things down into small pieces, give direction to your finances, and get a step-by-step way to achieve your goals.
The phrase “savings plan” is just one way to describe the process of saving enough money to buy a home, or raising money for whatever other life goal is important to you.
But in the case of investors who seek to have capital available in a future time, so that they can carry out ventures without leverage and without great risks, a savings plan can also be fundamental and at the same time the most viable option.
As a savings plan we can define a strategic process that allows you to make measurable, sustainable and consistent progress in financial matters to save money.
How to create your own Savings Plan
The details of your savings plan will depend on specific variables unique to your financial situation and your goals. But every strategy must include at least these three steps:
Set your goal
Determine the amount to save
Automate your savings
To create your own plan, you will need to know information that includes:
The objective you want to achieve (Example: buying a house, investing in an investment fund)
How much will it cost you to achieve this goal
When do you want to achieve that goal.
Here we show you how to see your financial situation today, that is, evaluate it in the most appropriate way possible and establish a savings plan that allows you to get where you want to go in the future.
What should we do? These are the steps
Set the goal for your savings plan
First of all, you must determine what you want to achieve with your savings. If your desire is to buy a house, you must calculate the amount of money that you must have every month to pay for your house. Paying your mortgage is a cash flow problem, which means that you must receive enough money each month to make that payment.
In the case of buying a house, the savings should be ready when you go to make the down payment. When you want to buy a house, your plan is likely to be to save 20% of the purchase price of the house to secure the purchase and finance the rest of the payment through a bank instrument, usually a mortgage or other type of loan.
Savings Plan to buy a house: Practical example
For example, if you want to buy a house for $ 400,000, you need to save $ 80,000 in cash to pay the down payment. Your mortgage will finance the rest of the cost. Generally, you will also need some additional cash to close the paperwork, and the lender may require that you still have a certain amount of cash available after your purchase. This extra cash is called your “cash reserve.”
Lenders often express the required cash reserve in terms of the monthly payment you make for your home multiplied by a certain number of months, with a range of 6-24 months generally. So if your lender requires a 12-month cash reserve and your monthly house payment is $ 2,000, you would need to have $ 24,000 in cash available after purchasing your home.
If you want to know more about buying real estate read: “Tips to Buy a Property to Live”
Have you ever heard that saying, “a goal without a deadline is just a dream?” It is an indisputable truth! The next step in your savings plan is to put a of time, a date, in this objective. Continuing with our example of the $ 400,000 house, when do you want to have your $ 80,000 saved and ready to fork out?
Maybe you want to buy your house in the next 3 years. Having that schedule defined allows you to continue with the next step when setting up your savings plan.
Determine how much you need to save
You know how much you need to save. You know you want to do it in 3 years. That gives you 36 months to save $ 80,000, which means you need to save $ 2,223 per month to reach your goal.
The hard part is when that number at the end of the month seems overwhelming. $ 2,223 is a lot of cash to save each month, especially considering that you’re probably already paying the rent (or the mortgage on a house you want to sell before buying a new one), all your bills, and other expenses that you can’t avoid in your day to day as food and clothing. You may also have to deal with student debt payments, which adds even more pressure to your goals.
You may need to dig a little deeper, restructuring the timings or working so your expenses can be adjusted, so that your savings plan will work for you if you find that your goal is currently out of reach.
Evaluate the current state of your finances
You cannot make a plan to achieve something in the future if you are not sure where you are today. That means you need to take a careful look at your current expenses and your saving habits.
You can use an online application, such as a budgeting tool available on Android or Apple’s AppStore, or set a budget using an automated spreadsheet, so you can track all your income, expenses, and transactions. You may want to carefully track where your money is coming from and what you’ve been spending it on for the past two to three months.
Key Data of your Financial Situation
You will want to understand some key facts when you look at your current financial situation:
How much you already have in savings that you can use to reach your goals (this does not include retirement savings, emergency savings, or investments for other purposes)
How much money actually goes into your checking account each month (your income, less taxes, retirement contributions, and other withholdings on your paycheck for things like health insurance)
How much money do you spend on basic necessities, including housing, food, and transportation.
How much money you spend on nonessential expenses like entertainment, shopping, and eating out.
The difference between your income and what you spend: How much do you really have left?
Knowing all this information and you can see what percentage of your income you currently have to allocate to your savings to achieve your goals. This could give you a precise idea of what expenses you could be eliminating or what adjustments you could make in your lifestyle to reach your goals or how much money you have already managed to save, but have not yet specified as savings.
Maybe you have $ 5,000 saved in a savings account. This money is separate from your emergency funds and you have not yet designated it as a savings strictly in your accounts. That could allow you to lower your total savings goal from $ 80,000 to $ 75,000, which means you now need to save $ 2,083 per month.
But if you realize that after your regular consumption and expenses, you only have $ 500 per month left to save, you will still have 1,583 less per month than you need to save for your savings plan to work.
So by looking at this information, you could begin to see that it is time to make some decisions to make your savings plan work in the future.