Creating a monthly savings plan

A monthly savings plan is a financial strategy designed to help you regularly set aside a portion of your income toward achieving various financial goals. Whether you aim to build an emergency fund, save for a big purchase, or work toward retirement, having a monthly savings plan can make a huge difference in reaching these objectives. This article explores the steps to create an effective savings plan, strategies for maximizing savings, and examples using Kenyan Shillings (Sh) to illustrate achievable targets.
Why a Monthly Savings Plan Matters
A monthly savings plan instills financial discipline by encouraging you to save a portion of your income consistently. It helps you manage your cash flow, track your expenses, and adjust your spending habits to meet savings goals. This financial habit builds a safety net over time, enabling you to handle emergencies or make significant purchases without going into debt. Consistent savings can also provide long-term benefits by giving you financial security and the freedom to make future plans with confidence.
Steps to Building an Effective Monthly Savings Plan
Determine Your Monthly Income and Expenses
The foundation of any savings plan is a clear understanding of your income and expenses. Start by calculating your monthly income after taxes and other deductions. Include all sources of income, such as salary, freelance work, rental income, or any side business profits.
Next, list all your monthly expenses, separating essentials (like rent, groceries, and utility bills) from discretionary spending (like dining out or entertainment). This analysis helps identify areas where you can cut back and reallocate funds toward savings.
For instance, if your monthly income is Sh100,000 and your total expenses are Sh80,000, you have Sh20,000 available for savings and discretionary spending. Setting aside a portion of this amount as savings can start building your financial cushion.
Set Clear and Specific Savings Goals
A savings plan is most effective when you have specific goals in mind. Consider both short-term and long-term goals, and assign an estimated amount to each. Examples of goals might include:
- Emergency Fund: Saving three months’ worth of expenses to provide a financial cushion.
- Down Payment for a Car: Setting aside funds for a down payment within the next year.
- Vacation Fund: Saving for a holiday at the end of the year.
- Retirement Savings: Putting away a percentage for long-term retirement needs.
Suppose you decide to save Sh300,000 for an emergency fund. By setting a monthly target (e.g., Sh10,000), you can reach this goal in 30 months or 2.5 years.
Choose a Savings Amount and Set Up Automatic Transfers
With your goals in mind, determine a realistic monthly savings amount. If your budget allows, aim to save at least 20% of your income. For instance, if your monthly income is Sh100,000, aim to save Sh20,000. Setting up automatic transfers to your savings account ensures that this amount is saved consistently.
Example: If you’re saving for an emergency fund with a target of Sh300,000, an automatic monthly transfer of Sh10,000 will allow you to achieve your goal in just 30 months. This consistency eliminates the temptation to skip savings and establishes a regular savings habit.
Allocate Savings Across Different Goals
If you have multiple goals, allocate a portion of your savings to each. Let’s say your monthly savings target is Sh20,000, and you have three goals: an emergency fund, a vacation fund, and retirement savings. You could divide your savings as follows:
- Emergency Fund: Sh10,000
- Vacation Fund: Sh5,000
- Retirement Savings: Sh5,000
This breakdown allows you to work on all goals simultaneously. Over time, as one goal is achieved, you can reallocate that portion to your remaining goals.
Track Your Progress Regularly
Monitoring your progress is essential to keep you motivated and ensure you’re on track. At the end of each month, review your savings contributions and make adjustments if necessary. Consider reviewing your goals every three to six months to see if you can increase your monthly contributions.
Practical Monthly Savings Strategies with Examples
1. The 50/30/20 Budget Rule
The 50/30/20 rule is a popular budgeting strategy that allocates 50% of your income to needs, 30% to wants, and 20% to savings. Using this structure, if you earn Sh100,000 monthly:
- Needs (50%): Sh50,000 for essentials like rent, food, and bills.
- Wants (30%): Sh30,000 for non-essentials like dining out, entertainment, and hobbies.
- Savings (20%): Sh20,000 toward various savings goals.
Challenge Yourself with Incremental Savings
To make saving more dynamic, consider incremental savings. Start small and increase the amount by Sh1,000 each month. For instance:
- Month 1: Sh5,000
- Month 2: Sh6,000
- Month 3: Sh7,000
By month 12, you’d be saving Sh16,000. This method gradually strengthens your saving habit without feeling overwhelming at the start.
Save Windfalls and Bonuses
If you receive extra income like a work bonus, freelance earnings, or a tax refund, consider saving it instead of spending. Suppose you get an annual bonus of Sh50,000. Allocating this entirely to savings could make a significant dent in a goal like an emergency fund or vacation.
Example Savings Plan
Let’s say your goal is to save Sh200,000 for a vacation in one year and to build an emergency fund of Sh100,000.
Monthly Savings Breakdown:
- Vacation Fund: Sh16,700 per month to reach Sh200,000 in 12 months.
- Emergency Fund: Sh8,300 per month to reach Sh100,000 in 12 months.
Total monthly savings: Sh25,000
By setting these specific amounts each month, you’ll achieve both goals within your desired timeframe. Adjust the contributions if you complete one goal early to continue building financial security.