How to create a personal savings plan in 6 easy steps

Trying to make smarter spending decisions? Personal savings plans give structure to finances, enabling short- and long-term planning with effective budgeting.

Strong budgets give structure to day-to-day spending, help you track incomings and outgoings, and minimize unnecessary purchases. Combine a plan with a savings account, especially one that builds compound interest with a beneficial annual percentage yield (APY), to build funds over time.

Savings plans are an essential part of a broader approach to financial health, helping provide a personal safety net and a pathway to achieving important financial goals.

This article provides an easy 6-step process for how to make a personal savings plan and reach your goals, no matter what they are.

Table of contents

• 1. Decide what you’re saving for
• 2. Track income and expenses
• 3. Set monthly savings targets
• 4. Commit to a budget
• 5. Decide what savings accounts to use
• 6. Monitor savings progress and make adjustments

1. Decide what you’re saving for

It’s easy to get off track with your savings plan if it isn’t real in your mind. Setting "S.M.A.R.T." goals for a savings plan can help you anchor your plans in real terms and make it easier to stay accountable and reach milestones effectively.

S.M.A.R.T. refers to outcomes that are specific, measurable, achievable, relevant, and time-bound:

• Specific: Choose a balance based on the event, item, or type of account. Calculate the entire cost of a holiday to get a firm target. For more general goals like emergency funds, you should still choose a target, for example $1,000.
• Measurable: Decide how much you want to save each month and how you’ll track your progress and measure the goal.
• Achievable: Make sure you can absorb the goal into your budget. Create a plan for how you plan to save.
• Relevant: Know why you’re setting a goal and what it means for your life.
• Time-bound: Set a date by which you want to reach the balance. This is a critical component of a goal because the timeframe sets the pace and helps you understand whether you’re on track.

Once you have the goal balance and the time frame, you can calculate how much you need to set aside in your monthly personal budget. If a goal doesn't fit your capabilities, you can modify the monthly contributions by changing either the balance or the timeframe.

Different savings plans can be tailored for specific goals and may include the following types of funds:

• Emergency fund: Additional savings kept for unexpected bills or expenses can be deposited into an emergency fund.
• Retirement savings: These funds are saved over longer periods of time to use at retirement age.
• Education fund: Money for educational expenses, such as college or university tuition, falls into this bucket.
• Vacation fund: A vacation fund could include savings for a dream holiday, family reunion, or big-ticket getaway.
• Slush fund: This miscellaneous savings fund can be used for any desired purpose.

2. Track income and expenses

Time for the hard part: Finding out how much money you spend on stuff you don’t need.  Reading over your bank and credit statements can be stressful, but doing it often is key to financial health and peace.

Remember that you’re just here to identify what you need to change. Set aside any financial guilt and focus on the positive impact that financial planning can have on your life.

Many online banking platforms offer handy spending breakdowns to help you track and categorize purchases, which is a great place to start. First, get a full picture of your spending as it currently exists, starting with the expenses that are most difficult to change:

• Fixed expenses: Set, non-negotiable expenses that you can’t change. Housing, childcare, car or loan payments, average utility costs, insurance, etc.
• Temporary expenses: Some expenses are necessary but won’t last forever. Families budgeting with small children, for example, may have high temporary costs like baby food, diapers, and baby clothes.
• Groceries: Add up how much you spend at grocery stores, on average, each month. Adjusting shopping habits can probably save you money, but it’s best to cut other areas first.
• Shopping: Everyone eventually has to replace items like clothes, shoes, household items, etc. Retain some budget for this, but assess where you can make cuts.
• Entertainment and eating out: Most of your spending cuts will likely come from here. Restaurants, food delivery, coffee shops, alcohol, and entertainment eat up a lot of money.
• Subscriptions: Most people have multiple subscriptions, such as streaming services, regular deliveries, gaming, etc. Cutting just a couple of subscriptions can make a big difference.

Now, list all the things you can cut out of your budget and how much money you can save for each item.

3. Set monthly savings targets

Work out how much you need to save each month to reach your goals. Let’s say you want to save $2,000 in six months, you would need to save $333 per month.

If you don’t think you can absorb that into your budget, try it first. Work out how much you would have to change to make it work.

Change your timeframe if you can’t save that much without cutting into necessary expenses. Instead of six months, try nine months. Then you need to save $222 per month.

Try to push your comfort level. The more you can save each month, the more powerful the effects will be later on, especially if you put money in high-yield savings accounts.

Building savings is an important money management skill, and it works best when you highly prioritize it.

4. Commit to a budget

Setting budgets can help you understand how much money you should allocate to each area of your life. For example, if your income is $4,000 per month, and you choose to save 10% of it, then you’ve got a savings budget of $400. From there, you can select achievable goals and timeframes.

Three common monthly budgets:

• 50/30/20 budget: This breaks your spending into a pie chart based on percentages of your total income. 50% goes to what you need, 30% to what you want, and 20% to savings. If you have big savings goals, you could make 30% your savings target instead.
• 60/30/10 budget: Similar to the 50/30/20 budget, but more ideal for families and people with high living expenses. 60% goes to what you need, 30% to what you want, and 10% to savings. You might find it more difficult to prioritize savings using this budget, but you could try modifying it to look more like 60/20/20.
• Zero-based budget: Rather than focusing on percentages, this budget aims to allocate every dollar and reach $0 after income and expenses. You can do this budget biweekly or monthly, which works well for people with irregular income or expenses. Other budgets can feel constraining if an area of your life demands additional consideration. This budget helps you make every dollar count and avoid overspending.

If you need help building a budget, download a financial planning worksheet. You can print it out or keep it on your computer and update it throughout your savings journey.

Sticking to your budget is important, but make sure it works for your situation. Everyone has different levels of necessary expenses, and situations change. Don’t feel guilty if you need to change your budget to accommodate changes in your situation.

5. Decide what savings accounts to use

Not all savings accounts are the same, and if you don't consider all the options, you might miss out on opportunities to make your money work harder for you.

The easiest way to get started is with a savings account with your existing bank. It makes transfers quick and easy. But your existing bank might not offer the best rates. The general rule of thumb is that the more returns a savings account gives you, the more restrictive it can be.

These are a few common account types to consider:

You may want multiple types of accounts for different purposes. A small, stable amount of money in a regular savings or money market account means you won’t be caught off guard by unexpected expenses or emergencies. That way, you can confidently put money into higher-yield accounts for long-term saving.

6. Monitor savings progress and make adjustments

As with any plan, you won’t know whether it works until you’ve already started. In the long term, it won’t work unless you are transparent with yourself.

Check in every month on your progress. Assess whether you were able to meet your savings goal that month, and ask yourself:

• Was it easy to reach your goal? If it didn’t feel challenging at all, you might want to increase it. If you were stressed out all month about it, consider lowering the goal.
• How do you feel about the amount of money you saved? Think about the possibilities or the security it offers you.
• How much more could you save without significantly impacting your life?
• How much are you willing to sacrifice for your future savings: more or less? It’s okay if the answer is less, but investigate why that is.

Use financial apps: Apps and digital financial tools can help manage subscriptions, pay bills on time, and assist with expense tracking.

Monitoring progress helps you make adjustments should your situation change. You might encounter temporary expenses or financial windfalls and should prepare for both.

Personal finance software and budgeting apps can help you stay motivated and on track to meet savings goals. Commit to keeping your app updated, and plan a day at least once every month to do a financial check-in.

Tips for a successful personal savings plan

Unexpected costs and household expenses are a part of life. But it’s possible to both plan for and handle them without a savings plan being derailed. Consider these financial discipline tips to help avoid unnecessary spending and stay on track:

1. Use automated transfers: Setting up recurring transfers to a savings account can help automate your finances and ensure consistency over time.
2. Manage expectations: Save and spend within your means and celebrate your wins, however small. Saving money is about making small choices that will have a big impact later on.
3. Use patience and determination: Self-discipline is the key to being a good saver because every day is a new opportunity to contribute toward your savings goals. Instead of sweating lapses and mistakes, learn how to stay on track next time.
4. Budget for fun and entertainment, too: Don’t suck all the joy out of your budget. You won’t sustain long-term savings if it makes you miserable, so actively plan to include fun expenses. Give yourself a budget that makes sense and enjoy some guilt-free leisure spending within your limits.

Potential benefits vs. challenges of savings plans

Planning and saving for the future helps you build wealth because small savings added up regularly over time can become large balances. Savings plans may be challenging to fit into your life, but they have huge potential benefits.

Personal savings plan potential benefits:

• Financial security: A savings plan can function as a security blanket, providing day-to-day financial backing.
• Peace of mind: Having extra funds on hand may help alleviate stress, knowing that unexpected financial challenges can be met.
• Financial freedom: Well-structured savings plans may benefit the ability to try new activities and ventures, with possible financial risk offset by a firm safety net.
• Fulfilling experiences: Disciplined saving helps you create a life that includes fulfilling experiences like trips, events, and reunions. You may find the occasional impactful experience much more rewarding than small monthly purchases.
• Achieving goals: Savings plans help to achieve long- and short-term financial goals.

Challenges that come with savings plans:

• Staying motivated to stay: A savings plan can feel difficult to accomplish if motivation or incentive is low, or goals feel overwhelming.
• Surprise expenses: Costs that come out of the blue can dent the flow of a savings plan and further impact motivation.
• Slow progress: Building up savings can take time and it’s possible to become demotivated. It’s important to stay the course and remain focused on individual goals.
• Life changes: Changing life circumstances can impact financial situations and cause plans to change.

Saving money on a tight budget

Even if you’re on a tight budget, it’s possible to save money. The key rule of saving is that multiple small amounts add up over a long period of time. These are a few ways to adjust your budget:

• Shop at thrift stores for clothes and furniture.
• Make use of hand-me-downs or donations for baby clothes and toys.
• Use meal plans to stay on target at the grocery store, and eat before you go shopping to reduce impulse buying.
• Use free entertainment options like parks and hiking trails.
• Take inexpensive trips like camping if you need to get away for the weekend.
• Regularly assess subscriptions and look for things to cancel. Ask how much you really use each streaming subscription, for example.
• Fix things such as clothes and appliances instead of replacing them whenever possible.
• Reduce car maintenance costs by learning to change your own oil.
• Use a high-yield savings account and contribute small amounts to it regularly, for example, round up purchases to the nearest dollar and put the difference into savings.

Try not to completely cut out entertainment or treats from your budget; you have to give yourself a break from time to time.