subject: Developing Your Savings Plan [print this page] Developing Your Savings Plan Developing Your Savings Plan
Many things play a role in your financial security and your ability to survive difficult circumstances. One key component is having an adequate reserve of savings for use in case of emergency. Unfortunately, research repeatedly points out that most of don't have enough savings on hand.
Savings are different from investments.
While investments are in place for their long-term earning potential, savings are set aside for use when previously unforeseen circumstances create an immediate need. Savings are emergency funds to which you need fast access.
"If you want to ensure your financial survival, you'll make the establishment of a good savings plan a top priority. Inadequate reserves can lead to unnecessary increases in debt loads (hindering your long-term financial viability) or true disasters. You don't want to go through life on the tightrope without a net. You savings plan will serve as your financial safety net, helping you to survive through tough times, should they occur."
The first step is creating an emergency fund. This represents the minimum in savings you should have in safe liquid assets. We concur with others who recommend creation of a $1,000 emergency fund as the start of your savings strategy. This isn't necessarily a perfect number. It is, however, a sum capable of handling most of the more common emergencies people tend to regularly confront.
If you have your $1,000 in place, you need to immediately place it somewhere safe. A standard savings account can be a perfect choice. You'll want to "fill" that account as quickly as you can by cutting expenses and/or earning more income.
Make the creation of an emergency fund one of your highest financial priorities.
After you have $1,000 set aside, you'll want to protect itfrom you! That means establishing a strict personal definition of what constitutes an emergency and making a commitment to abide by that standard. Too many people fail to build adequate savings because they shift the idea of an emergency based on their desires as a consumer when the mood suits them.
Once the emergency savings are in place, it's time to start thinking about building your savings to a truly adequate level over time. Having $1,000 in reserve is a good way to protect yourself in the face of many emergencies, but it isn't really enough for major challenges.
You want to be prepared for more severe situations including prolonged time without work or some other completely unpredictable major expense.
The process of building the long-term plan begins by making a choice regarding the kind of account you'd like to use for savings. While a simple savings account is fine for your emergency fund, the higher dollar value of your overall long-term savings justifies utilization of an investment vehicle that offers a higher rate of return. Certificates of Deposit, high-yield savings accounts and money market accounts are possibilities. Remember, liquidity is still a key consideration. In the case of an emergency requiring use of savings, you want to be able to get your money immediately.
After you know where you'll build your "safety net", it's time to think about how much money you'll need in the account. A standard rule of thumb maintains that you'll want to keep enough money to cover three to six months of expenses in the account. Add to that any other upcoming expenses you know may be coming up in the next five years. You can begin setting aside funds to meet those expenses right away based on a relatively simple calculation involving the length of time until the event.
The final part of the process is deciding whether or not to automate your savings plan.
While some people have the money destined for their savings taken automatically from their primary checking account or as part of a direct deposit arrangement, others prefer to handle the distribution manually. Either plan can work, but the manual option does require a higher degree of commitment to savings accumulation.
Creating a responsible savings plan isn't necessarily complicated, but it does involve a number of important calculations and decisions. That's why recommend formulating your plan based on a comprehensive, step-by-step guide to the process. With a good set of instructions, building up our reserves should be simple.
