What Is a Savings Plan?

What Are Savings Plans?

Savings plans help you set financial goals, determine how much you need to save each month to reach them, decide where to put your savings and track your progress. Following a plan for saving can help you achieve a variety of personal financial goals, such as building an emergency fund, saving for a down payment on a home or financing your retirement.

Types of Savings Plans

You likely have a mix of short-term, medium-term and long-term financial goals, and you can use different savings plans to achieve each of them. Listing your financial goals will help you decide how much you need to save and what type of savings strategy makes sense for each goal.

Short-Term Savings Plan

A short-term savings plan is for money you plan to use relatively soon—within one to two years. Short-term financial goals might include:

• Building an emergency fund
• Buying a new sofa
• Paying for a vacation
• Accumulating a security deposit and rent to move to a new apartment
• Paying off credit card debt
• Covering one-time annual expenses such as insurance premiums

Learn more: How Much Money Should You Have in Your Emergency Fund?

Medium-Term Savings Plan

Medium-term goals are typically things you want to achieve in three to seven years. Examples of medium-term financial goals might include:

• Paying for your wedding or honeymoon
• Making a down payment on a new car
• Making a down payment on a home
• Covering the cost of parental leave and early child care
• Paying for major home renovations

Long-Term Savings Plan

Long-term financial goals are typically 10 years or more in the future. Some long-term goals you have might include:

• Saving for retirement
• Financing your child's college tuition
• Paying for your child's wedding
• Paying off your mortgage early
• Purchasing a second home or rental property

Tip: Some bank accounts offer savings buckets or savings vaults. This digital banking feature splits your savings into separate sub-accounts, offering a convenient way to manage multiple savings goals without maintaining multiple accounts.

Learn more: How to Set Financial Goals

Why Do You Need a Savings Plan?

Having a plan for saving can make it easier to live within your means and give every dollar you earn a purpose. That way your money goes toward the things that matter most to you.

Following your savings plan can also help reduce your reliance on loans or credit cards for unexpected expenses. Paying for emergencies like a big medical bill or home repair with a credit card could lead to high-interest debt if you can't pay your balance quickly.

It's natural to feel a bit overwhelmed if you have lots of different financial goals. A savings plan can make big goals feel more manageable. It can also help you prioritize competing goals, such as saving for a wedding and a home down payment at the same time.

Finally, a savings plan can encourage consistency, which is key to successful saving. When saving becomes a habit you don't even think about, it can be easier to reach your financial goals.

Learn more: How Much Should You Save Each Month?

How to Create a Savings Plan

Follow these steps to craft a savings strategy that works for you.

1. Set Goals

Building an emergency fund and saving for retirement are important financial goals for everyone. An emergency fund can help you avoid debt when unexpected expenses pop up, while a retirement fund can help ensure a comfortable future.

In addition to these, think about other financial goals you want to achieve and then determine:

• How much money you'll need for each goal
• A time frame for reaching each goal (such as saving enough money for a vacation in 12 months, a down payment on a car in three years and retirement in 35 years)
• How much money you'll need to save each month to reach all your goals

Learn more: Sinking Fund vs. Emergency Fund: What's the Difference?

2. Make a Budget

Are your savings goals realistic? To find out, you'll need to create a budget. Start by adding up your monthly income and expenses. Divide expenses into essentials (such as rent, car payments and student loan payments) and discretionary expenses (such as meals out, streaming services and new clothes). Also include irregular expenses that are due once or twice per year, such as car registration, property taxes and insurance premiums.

One popular budgeting method, the 50/30/20 rule, allocates 50% of your income to essential expenses, 30% to discretionary spending and 20% to savings, including retirement savings, and paying down debt.

If your budget doesn't leave room to save enough for your savings goals, you can do the following:

• Look for ways to reduce your expenses.
• Find opportunities to make more money.
• Adjust your savings goals to be more realistic.

Learn more: How to Stick to a Budget

3. Find the Best Place for Your Savings

The best place for your savings depends mostly on how soon you expect to need the money. Where you keep your savings can also affect the interest rate your money will earn. Here are some options to consider.

• Traditional savings accounts offer security and easy access to funds, but the annual percentage yield (APY) is usually relatively low. Other options could help your money grow faster.
• High-yield savings accounts typically earn a higher rate of return than traditional savings accounts, while still keeping your money safe and accessible. This can make a high-yield savings account a good option for emergency funds and short- to medium-term goals.
• Money market accounts often offer more competitive APYs than traditional savings accounts. They may also have some features of checking accounts, such as the ability to use debit cards or write checks, that make them more flexible.
• Certificates of deposit (CDs) generally offer higher interest rates than traditional savings accounts, but withdrawing funds before the CD matures typically triggers penalties. With terms ranging from one month to 10 years, CDs can be a good place for savings you won't need right away, such as a home down payment.

For longer-term goals, using tax-advantaged investment accounts typically makes more sense than keeping your savings in a cash account.

• Education savings account: A 529 plan or Coverdell education savings account (ESA) can help you save for your child's education. Tax-advantaged 529 plans, available from states and participating schools, let you save for qualified education expenses, which may include college, graduate school, K-12 education, apprenticeship or credentialing programs and student loan repayment. Coverdell ESAs offer more investment choices than 529 plans, but contributions are capped at $2,000 annually.
• Retirement account: Tax-advantaged retirement accounts like a 401(k) or individual retirement account (IRA) typically allow you to invest your savings in the stock market, which historically delivers higher returns than savings accounts over time. If your employer doesn't offer a 401(k) plan, you can open an IRA yourself.

Use a Savings Calculator

You can use the savings calculator below to compare potential earnings from different savings accounts. Just input the account's APY and compounding frequency, the starting amount you plan to deposit, your expected monthly contribution and how long you expect to leave the money in the account.

Savings calculator

Tips for Saving Money

Here are some practical ways to save money.

• Automate your savings. Many employers let you deposit part of your paycheck directly into a savings account each payday; some even let you split your direct deposits among multiple savings and checking accounts. If your job doesn't allow this, you can typically automate transfers from your checking account to one or more savings accounts using your bank's mobile app or website.
• Save windfalls. Anytime you get extra money, such as a work bonus, tax refund or cash gift, put it into your savings.
• Try a savings challenge. Make a game out of saving with a savings challenge such as skipping restaurant meals for a month or eliminating discretionary spending for a week.
• Reduce unnecessary spending. Can you cancel unused subscriptions and memberships, take shorter showers or use the air conditioning less often? Buying generic products, looking for discounts and coupons and avoiding impulse purchases can help you save more.
• Comparison shop. Regularly compare rates for home or renters insurance and auto insurance using an insurance comparison marketplace. If you find lower prices, put the difference into your savings account. You may be able to negotiate lower bills for your internet and phone service too.
• Use accountability tools. Teaming up with a friend to be your accountability partner can help you stick to your savings plan. You can also download an accountability app to help build a savings habit.
• Benefit from employer matching. Some employers match the amount you contribute to your 401(k) plan up to a percentage of your pretax annual wages. Contributing at least enough to max out any employer match can give your retirement fund a significant boost.
• Avoid lifestyle creep. After getting a raise, it can be tempting to spend more. Funnel half (or more) of your pay increase into savings instead.
• Increase your income. Reach your savings goals faster by taking on extra shifts at work, getting a better-paying job or trying for a promotion. You can also start a side hustle, such as tutoring, delivery driving or selling items online.

Learn more: Simple Ways to Save Money

The Bottom Line

Following a savings plan can help you work toward your financial goals while remaining flexible as your income, expenses and priorities evolve. Don't get discouraged if you can only save a little bit of money each paycheck. Make saving a regular habit, like brushing your teeth, and your savings account will grow over time.

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