Setting Up a Savings Plan

Sam Morgan User
Sam Morgan
Co-founder, COO

Almost everyone wants to save more money this year, but the difference between hoping to save money and actually saving money is a plan. Let’s make one.

Our financial lives are complicated. Between credit cards, savings accounts, bills, and investments, there is a lot of money moving around and very little of it is properly tracked. Not having a good sense of where your money is going makes saving money difficult to say the least. Together let’s tackle the challenge of establishing a savings plan for 2020 and let’s start with the facts.

Where does my money go?
I have always found the act of creating a budget to be useful but also overwhelming. Imagine you want to run a marathon in the summer of 2020. You currently don’t run much, but would like to pick a lofty goal so you set out to go from “I know how to run but don’t” to “Let’s run 26.2 consecutive miles” in six short months. You buy the shoes and get a calendar out to set up your running plans because on the work of countless others that have also taken on this challenge, but you don’t complete an assessment of yourself as a runner. How are your joints? Is your diet in line with this workout plan? It’s easy to set plans in a vacuum, but if you do, the chances of you keeping them are far lower than if you first complete a self-assessment and then build goals from there. Before we establish your savings plan for 2020 let’s do a quick assessment of your personal finances using the data available to you and build from there.

All the data.
This next part is scary but extremely important. Seeing how your money leaves from your accounts to pay for the various parts of your life and be both enlightening and frightening, but it’s a required set before we can build a savings plan.

Accounting for Accounts. You can set this up however you like, but I prefer to use Excel or Google Sheets to organize this type of information. However, you choose to set this up do not put any passwords or account numbers in the document for your security. You need to make a full list of all of the financial accounts that you use. Included should be your depository accounts (checking, savings), credit accounts (lines of credit, credit cards, student loans) and investment accounts (brokerage, IRA, 401K). For each account you need to label the type of account that it is, the name of that account (do no use the account number), the associated rate for that account and the account balance. Why do we need the rates? Great question. When you are establishing a savings budget, you need to prioritize your accounts depending on the rates associated with your accounts and your investment time horizon. Let’s look at two scenarios:

To simplify things, I have kept the rates for the accounts consistent across both scenarios, but the differences in balances should drive very different approaches to savings for each. In scenario 1 you have a longer time horizon (20 years) but you carrying some very expensive credit card debt. If you had a single extra dollar you should 100% use it to pay down that $2,000 of credit card debt instead of putting in savings or your investment account. In the second scenario, there is still a bit of credit card debt which should be addressed first, but then we should work to get some of the funds out of savings and into an investment account for the higher return on investment.
From the example, you can see that many factors can change how you prioritize the way you move money to certain accounts like savings vs. investments, but your list of accounts is just the first step in setting up your savings plan.

The Details.
With a full list of your financial accounts, we now need to dig into the details and that means transaction data. Ten years ago this exercise would require looking at paper statements from your various banks and then creating a spreadsheet to organize it all, but today you are just a few clicks away from transaction data heaven. Although it differs from bank to bank, you should be able to get a CSV (comma separated values) file of all of your financial transactions for the last two years from each financial account that you have. The aim here to see where the bulk (90%) of your money goes in the course of a month. You should combine like items together in the Excel you have already started to put together a table like this:

You have accomplished the hardest part of this whole exercise by putting the details of your spending together - nice work! Like training for a marathon, you now have your baseline and start to build some realistic goals for saving in 2020 instead of going for the gold right off the couch.

If we look at the example above, a couple of things immediately stand out. This person seems to have meaningful income but they are only saving $100 per month (1.9% of total income). The next stand out is that the “Other” category is meaningful in size ($715 a month is 13.6% of total income) and that seems to be for items outside of normal expenses (probably things like travel). It is only when you see these numbers that you get a sense of how you might change them over time. Completing this exercise you should try and run this analysis, categorize your spending in a given month and then set targets on the categories you can control like “Other” and “Restaurants” to see if you can reduce them over time.

Rethinking Savings.
You have a listing of your accounts with the balances and rates which should help you decide where to send extra money first (expensive debt first followed by an emergency fund and then long term investments) and you have a sense of your monthly expenses and how you might improve them, but what did your savings look like? If you had a line item at all in your transaction data that showed you moving money from your checking account to another place like a savings or investment account you are already ahead of the curve, but for many that number might be zero.


The Formula.
When we think about money and specifically savings, we normally think along with transitional accounting logic:

Income - Expenses = Savings

In this setup, we have income which we then use to pay for all of our things and whatever is leftover becomes savings. The snag, of course, is that there is always something else to spend money on and the “whatever is left” part can be zero, or worse negative. To establish a savings plan for 2020 we need to look at our monthly expenses and determine want line item we can add for savings - we need to make savings an expense:

Income - Savings = Expenses

The change is subtle, but if the money remaining in your account after you have accounted for the savings you want to attain, you will force yourself to rethink expenses, particularly items like “Restaurants” or “Other.”
Let’s have 2020 be the year that we make time for savings. Every little bit of savings or debt reduction helps and the work you put in now will serve you for years to come. Happy saving!