How to build a savings plan

Having a clear objective of what you are saving for is the first step in building a savings plan. Do you know what you are saving for? Have you planned for savings that will enable you to survive difficult situations such as recessions or unexpected events? Have you planned your finances so that you can have a steady and adequate income after your retirement?

When setting your savings goals, make sure that these are well defined. To facilitate this, you are encouraged to adopt the SMART criteria and establish goals that are Specific (i.e. Focused), Measurable (i.e. Quantifiable), Assignable (i.e. Under the responsibility of whom?), Realistic (i.e. Attainable) and Time-related (Placed into context).

If you know how much you need to save and when you need to save it by, the next step would be to work out a savings plan per goal. Set a schedule by dividing the total goal amount by the number of weeks, months or pay periods between now and your goal date.

You are encouraged to also make use of online resources, such as the following Savings Goals Calculator: http://www.thecalculatorsite.com/finance/calculators/savings-goal-calculator.php, to support you in determining either how long it will take for you to reach your financial goal or else how much you should save each month to reach your target.

Life is full of unforeseen circumstances, both at personal and business level. Therefore, your top priority should always be to create a contingency fund, regardless of whether you are self-employed or on a payroll. This will enable you to have sufficient liquid assets available to meet any financial needs during an emergency or a period of income disruption.

The rule of thumb is that your contingency fund should be equal to at least 3 months of your overall expenses. That said, the size of your contingency fund largely depends on the nature of your work and the variability of your income. Make sure you keep it separate from other savings and use it for emergencies only!

Before creating an actual contingency fund, you are encouraged to:

1. Define what constitutes an emergency:
   Make sure you have a clear understanding of what qualifies as an emergency to you – be it on a personal or business level. A personal emergency could be an urgent medical intervention, whilst a business emergency could be as simple as equipment repairs or as complex as a fire in your premises.
   
   
2. Establish where to save the funds:
   

   Ideally, contingency savings should be placed in an account which can be accessed in the quickest time possible.
    

3. Indicate how much you need to allocate to this fund:
   

   Once the type of saving account has been selected, it is important to work out how much should be allocated for savings. This should be done after all the operating costs have been met. Having sufficient cash reserves means the business remains operational even when disaster strikes.

It is crucial that your financial goals are realistic and attainable. Therefore, make sure that you know your budget well enough to see if you will be able to reach your set goal in the desired timeframe. Whether you make an income of €30,000 or €150,000 a year, you need to at least be aware of your average annual spending to confirm whether you can afford your savings plan after all.

However, do not stop at estimating your average annual spending. Go a step further and review how you are spending your money. This will not only put you in a better position to determine how much you can allocate to savings, but also incentivise you to make any changes to your spending habits, if required. If you find that your income is greater than your expenses, it’s a good start and you can move forward with creating your savings plan. If your expenses are higher than your income, then you should definitely look into applying changes to your spending practices.

In addition, the following tips can be useful in enhancing your saving opportunities - do consider them!

• use extra types of income such as tax refunds and bonuses for your savings
• restructure or get rid of debt to lower interest costs - debt can suck up tons of money. That's why it’s imperative that you eliminate as much debt as possible
• keep track of everything you spend and take buying decisions prudently
• manage spending within your existing and not expected income
• cut down on small expenses - rank your non-essential expenses and cut the items on the bottom of the list
• start early. That way you can take full advantage of the power of compound interest

To make sure that your savings plan is thoroughly successful, you need to make it a priority over all other forms of spending. Automatic saving methods, provided by most banks, can make your life ten times easier in this regard.

You are less likely to spend money if you don’t see it in your current account. To this purpose, banks can be asked to automatically and regularly transfer an amount of funds to your savings account. Setting up such regular fund transfers is quick, easy and can help you reach your financial goals faster.

Remember that your savings plan and budget are living documents. They should therefore be reviewed every month to ensure that:

• they reflect your current situation and goals; and 
• you are saving as much as you can.

Do keep track of your progress. At a point in time, you will experience positive or negative unexpected changes to your income or expenses. If you end up with more cash to spare, you could reach your goal faster by making higher contributions, or you could even contribute to another savings goal.