Chapter 4: Developing and Evaluating a Savings Plan

Chapter 4: Developing and Evaluating a Savings Plan

Saving money might seem like an insurmountable obstacle, but it’s never too late to make positive changes and set goals. Every savings plan should start with a goal to give you direction and keep you motivated. When you have a clear vision of where you want to be and the steps you need to take, you can set money aside and achieve your financial dreams.

In this chapter, we’ll help you set financial goals and show you how to budget and save money. If you want to learn how to save money on insurance, we’ll be happy to help you at David Pope Insurance.

What Are Financial Goals?

Financial goals are how you spend and save money to reach the desired outcome, either in the short term, long term or both. Examples of financial goals include saving for retirement or creating an emergency fund. You may have several financial goals at once, and your goals might change over time.

How to Create Personal Financial Goals

Setting a financial goal mainly involves sitting down with a pen and paper and mapping out where you are, where you want to be and how you’ll get there. It helps to have financial documents like bank and credit card statements close by to evaluate your current situation.

When you’re ready, you can use this worksheet provided by Consumer Financial Protection Bureau as a template for setting a new financial goal, or you can take the following steps:

1. Identify Your Goals

It’s essential to consider what matters most to you to identify your financial goals. For instance, is it more important to buy a new car or pay down debt? Depending on your situation, it may make sense to prioritize goals and focus on one at a time.

However, it’s also possible to work on several goals at once. You might create a list of short-term goals, such as saving for a vacation and buying a new office chair. A short-term financial goal is something you want to accomplish in one to three years.

At the same time, you might also work on medium-term and long-term goals. For example, you might plan to save enough for a down payment on a home over the next five years or invest a certain amount of money each year for your retirement. Write down all of your goals.

2. Examine Your Situation

After you’ve identified what you want to accomplish, examine your current financial situation and assess your income, budget and net worth. By knowing where you stand financially, you’ll know which goals you can realistically meet in your desired time frame. You might also decide to reduce some of your expenses or find another income source to reach your financial goals.

3. Create SMART Goals

After you’ve narrowed down your aspirations, turn them into SMART goals. SMART stands for specific, measurable, achievable, realistic and time-bound. SMART goals are meant to help you focus, stay motivated and determine a clear path towards success. The National Endowment for Financial Education provides a worksheet to help you set financial SMART goals.

4. Monitor Your Progress

Don’t forget to track your spending and monitor your progress. If you’re struggling to meet your savings goals every month, make adjustments or consider ways to increase your income.

What Is a Personal Savings Plan?

Your personal savings is money set aside for major non-emergency expenses, and it should be kept separate from your retirement savings and emergency fund. You might allocate funds to your personal savings account to save up for a vacation or a home renovation, for example. A personal savings plan is your way of saving enough money to reach a goal.

Why Is It Important to Set Your Financial Goals Before You Create a Savings Plan?

It’s important to develop a savings plan based on your personal financial goals so you can prioritize goals and save money in the right places. As you set SMART goals, you’ll also discover how much you need to save. For instance, if your goal is to add $2,400 to your emergency fund in a year, you can plan to save $200 a month to reach your goal.

Overall, goal-setting can help motivate you to follow through with a savings plan.

How Do I Develop a Personal and Household Savings Plan?

A personal savings plan is for items you want or need that you can wait for, while household savings should be for home repairs and maintenance. Before you create a personal or household savings plan, you need to look at your budget and make sure you can also put money into an emergency fund. You should have a savings plan for an emergency fund before setting other financial goals.

To start any savings plan, you may first want to open a savings account for the specific goal. You might find it helpful to have a savings account for each financial goal at your bank, so you can track savings and spending easily. Once you have a savings account, set up a monthly automatic transfer from your checking account.

How to Save Money on Groceries

Most households can’t avoid buying groceries, but fortunately, it’s easy to reduce a grocery bill. Buying groceries in itself can help you save money on food. According to a recent survey, 78% percent of Americans say they are saving money by not going out to eat. Still, there are plenty of ways to save money at the supermarket. Here are some tips:

• Plan meals before you shop and make a list.
• Use your supermarket’s flyer to plan meals.
• Stick to your list and only add extra items if they are necessary.
• Eat before you shop to reduce impulse buys.
• Choose budget-friendly recipes.
• Opt for seasonal produce.
• Buy frozen or canned fruits or vegetables for out-of-season produce.
• Purchase frozen seafood over fresh seafood.
• Buy less expensive meat or incorporate meatless meals into your weekly plan.
• Use what you have before buying new items.
• Avoid convenience foods and choose whole foods instead.
• Purchase generic brands with the same ingredients as name brands.
• Use coupons for things you need.
• Shop with a basket.
• Compare prices on different shelves.
• Don’t buy toiletries in the grocery store.
• Don’t buy groceries in convenience stores.
• Track how much you’re spending and create a grocery budget.

How to Save Money on Gas

According to the Consumer Expenditure Survey, households spent an average of $2,094 on fuel and motor oil in 2019, or about $175 a month. If you use your car a lot for work or other reasons, you can try the following money-saving tips to reduce your monthly gas bills:

• Reduce idling by turning off your engine if you park your car for longer than 10 seconds.
• Avoid speeding and aggressive driving.
• Use cruise control when you can.
• Only use air conditioning when necessary.
• Close the windows when you drive at high speed.
• Avoid storing items on the top of your vehicle.
• Don’t store heavy items in your car.
• Take care of several errands in one trip.
• Avoid driving during rush hour whenever you can.
• Use your car manufacturer’s recommended motor oil grade.
• Ensure your tires are properly inflated.
• Keep up with regular car maintenance.
• Use a site or application like GasBuddy to find the least expensive gas prices in your area.
• Consider using a credit card with cash back for gas purchases.

How to Save Money on Your Electric Bill

For many households, utilities take up a good portion of their income. According to the Consumer Expenditure Survey, Americans spent about 6% of their income on utilities in 2019. For someone who makes $40,000 a year, that represents $200 a month. While it would be nice to have an extra $200 to stash away each month, you likely don’t want to give up electricity. Instead, you can reduce your electric bill in the following ways:

• Install a programmable thermostat.
• Turn your thermostat down in the winter and up in the summer.
• Let dishes air-dry instead of using the dishwasher’s drying cycle.
• Turn lights and the TV off when you’re not in the room.
• Unplug your TV when it’s not in use.
• Let clothes air-dry.
• Add insulation to your home if needed.
• Seal air leaks around doors, windows and pipes.
• Keep your heating, ventilation and air conditioning system (HVAC) well-maintained.
• Use energy-efficient light bulbs.
• Only wash full loads of dishes and clothing.

How to Save Money on Your Water Bill

Your water bill amount depends on factors like how much water you use and where you live. While you may not be able to change the cost of water consumption in your area, you can take steps at home to cut down on your water bill. Follow these tips:

• When landscaping, use plants that are tolerant to drought or require minimal watering.
• Replace old and inefficient appliances with new ones.
• Take showers instead of baths.
• Limit the time you spend in the shower.
• Don’t leave the water running as you brush your teeth.
• Repair leaks.
• Install low-flow fixtures.

How to Save Money for a House

Are you yet to buy your first home? If so, you may need time to save up for the down payment and closing costs. Here are steps you can take to save money for your house-buying goals:

• Investigate: First, investigate home prices in the area where you plan to live. Use your research to estimate how much you need to save.
• Choose a down payment amount: Next, think about the down payment amount you can realistically afford. Determine if you qualify for a government loan, which will allow you to put a lower amount of money down on a house. 
• Don’t forget closing costs: Closing costs are additional expenses you need to pay to complete the transaction. They typically include mortgage-related fees, insurance, taxes and other charges. Closing costs are affected by the home’s value and location, but you can expect to pay between 2% and 5% of the home’s purchase price. Add estimated closing costs to the amount you need to save.
• Give yourself a deadline: Set a deadline for reaching your savings goal. Figure out how much you can set aside each month to go towards buying a house.
• Open a high-yield savings account: Opening a high-yield savings account can help your money grow. A high-yield savings account offers a higher interest rate than a traditional account so you can save for a home faster.

How to Save Money for a Car

Car prices vary greatly and depending on the vehicle’s condition, make and model. Before you start saving up for a car, you need to decide what you can afford. Your car budget will help you eliminate choices out of your price range. Be sure to consider the cost of insurance, maintenance, taxes, registration fees and other related expenses. Here are tips to help you save for a car within your budget:

• Determine what type of car you want and look up the fair purchase price in the Kelley Blue Book.
• Decide if you want to buy a new or used car.
• Consider if you want to pay for a vehicle in full, take out a loan or finance a car through a dealership.
• If you decide to take out a loan, use an auto loan calculator to estimate your monthly payments.
• Figure out how much you can save each month for your car and add it to a savings account.
• Cut back on expenses or earn extra income to help you save faster.

How to Save Money for Kids

Raising a family brings a lot of joy — and many expenses. According to the U.S. Department of Agriculture (USDA), the cost of raising a child is around $234,000, and this amount doesn’t include college. If you break this down into 18 years, it takes about $13,000 a year to raise a child. Considering the costs, it’s a good idea to start saving for a child as soon as you can. Here are steps to save money for kids and things to consider:

• Evaluate your current financial situation.
• Plan to save for an emergency fund if you don’t have one.
• Open up a separate high-yield savings account for your child.
• Consider contributing to a 529 savings plan to save for your child’s college education.
• Evaluate your current health insurance plan and decide if you need to make changes.
• Think about child care and if you’ll become a single-income household or need to pay for day care.

How to Save Money for Retirement

The average American spends 20 years in retirement, yet only 40% of people have calculated how much they need to save for retirement. If you haven’t started a retirement savings plan yet, try not to panic. It’s better to start saving for your retirement now than never.

First, know how much money you need to save for your retirement, which may be 70% to 90% of your current income. So, if you plan to save 70% of a $40,000 annual salary, you’ll need $560,000 to retire for 20 years. However, you might want to save more or less than this amount depending on how much you plan to spend during your golden years.

To save money for retirement, sign up for your employer’s 401(k) plan and contribute as much as you can afford. If your employer offers a pension, make sure you understand how it works. If you don’t have retirement plan options through your employer, consider contributing to an individual retirement account (IRA). Often, you can deduct the money you contribute to your IRA from your taxable income every year. This means you’ll pay less in taxes.

What Are 10 Ways to Save Money?

Once you’ve established financial goals, you need a way to reach them. To sum up this chapter, here are 10 ways to save money that just about anyone can apply:

1. Set up an automatic transfer from your checking to your savings account.
2. Keep track of your spending.
3. Cook meals at home.
4. Find out if you’re overpaying for auto or home insurance.
5. Buy used items when you can.
6. Only buy things you need.
7. Try generic brands.
8. Sell items you don’t use or want.
9. Use coupons.
10. Spend less on vacations.