The Gaps in Your Savings Plan

Congratulations, you’ve figured out the secret to saving - spending less than you earn. Now, all of your expenses are paid monthly, including debt, and you have money in a savings account that you watch grow month to month. But what do you plan on doing with that money? Spend it when things come up? Use it all for a big purchase and then start back from a zero balance again? A good budget has a spending plan and a savings plan. Just like you know what your monthly expenses are and how to allocate money towards them, you should also know what your savings plan includes, and how to allocate money towards those categories.

But what I see with my clients is that although they are excited about finally being able to grow a savings account, they often miss out on important things to include in their savings plan; or don’t have a savings plan at all. I get it, if you don’t know what you’re saving for, how are you expected to allocate money towards it? Here are some common gaps that you need to address in your existing, or newly created, savings plan:

Short Term Savings

Emergency Fund:

An emergency fund is the key to avoiding the cycle of debt and should be saved in a dedicated account. Some expenses that an emergency fund can cover include loss of income, accident or injury, major car or home repairs or even major appliance repairs or replacement. Here are 4 steps to creating an emergency fund:

Calculate Your Emergency Fund Amount

My personal rule of thumb is 6 to 12 months of your monthly income because you never know what type of emergency can hit. Hello COVID! (Need I say more?!)

Open a Separate Savings Account

Your emergency fund must be saved in a separate, dedicated account. If you have this commingled with other savings, you run the risk of seeing a sexy balance and then depleting your account before an emergency hits. Note: If you’re in Canada, I highly recommend using a TFSA for your emergency fund to avoid unnecessary taxes.

Set Up an Automatic Savings Plan

Set up an automatic savings plan so that your money is automatically transferred into your emergency fund every month.

Funding it Faster

Make a commitment to put any extra funds you receive into your emergency fund (ie. bonus, tax refund, gifts, etc).

And most importantly, if you do have to use some of the money in your emergency fund, don’t forget to make a plan to replenish it.

Annual Expenses:

These are expenses that you know are going to come up every year, like presents for Christmas, anniversaries and birthdays. We typically forget to save for these expenses and when they arise find ourselves swiping the credit card.

Like your emergency fund, it’s important to make sure your annual expenses are saved in a dedicated account. Why? Because when you have all of your savings together in one account, it’s easy to fall into the trap that you have enough money for a new pair of shoes, or a new wardrobe, all while forgetting the balance you see includes funds that are dedicated for future expenses. Other things that might fall into the category of annual expenses are property taxes, vet costs, and car or home maintenance.

Vacation Fund:

This one is non-negotiable for me. I want at least one to two really good vacations every year. Your vacation fund is something you can choose to include in your annual expenses instead of a stand alone account. However, having a dedicated account is a great way to get the family involved in seeing the balance grow and having everyone know how close you are to meeting your vacation fund goal.

Saving for your vacation ensures you don’t hit exhaustion or burn out and then make an impulsive decision to get away even though you can’t afford it or don’t have enough money to fund it. Coming back from a relaxing vacation and then having to climb out of a mountain of debt doesn’t sound like a vacation to me!

Long Term Savings

Retirement:

Did you know the #1 reason people don’t save for retirement is because they believe they have time? If you’re a 30 year old, retirement probably seems so far away, but starting to invest now as opposed to in your 40’s can make a huge difference in the value of your investment at the age of 65. That’s why it’s never too early to start saving.

There are a number of ways to start building your retirement:

Leverage your employer match programs if offered
Set up an automatic savings plan so you’re not waiting until the end of the money to “see” if you have any money left
Contribute any tax refunds directly towards your retirement
Review your budget and adjust expenses to allow more of your money to go towards your retirement.

Living out of a saving mindset as opposed to a spending mindset will get you closer to your savings goals and making sure you don’t have any gaps in your savings plan will help you create the financial life you are worthy of.

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