How To Plan Your Savings

by Tax Guy - Burlington Accountant on December 22, 2010 Print This Post Print This Post

Creating a net worth statement and planning and creating your cash flow budget are important cornerstones of you financial plan. However, it’s important to include savings for things such as retirement, home ownership, and major purchases.

The net worth statement and cash budget are starting points but are not themselves the goal but rather documents to help you achieve your goals. They are used to help convert aspirations of retirement, home ownership, and vacations into clearly stated objectives.

Set Your Overall Savings Goal

Your savings plan should start with general savings strategies that increase your household net worth: increase your assets (i.e. increase your savings and investments), decrease your debts, or some combination of these two options. Thus you should consider your savings plan in both debt reduction and asset accumulation.

You can use a savings goal setting worksheet to help you identify how much you need to save to realize your goals and helps you commit a portion of your income to achieve these goals.

Set Your Overall Savings Goal

By spiderpop via Flickr

Your savings plan should start with savings strategies that increase your household net worth: increase your assets (i.e. increase your savings and investments), decrease your debts, or some combination of these two options. Thus you should consider your savings plan in both debt reduction and asset accumulation.

You can use a savings goal setting worksheet to help you identify how much you need to save to realize your goals and helps you commit a portion of your income to achieve these goals.

Example Savings Goal Setting Worksheet

Goal Amount Needed Number of months needed to save Expensed return on savings Monthly savings needed
Vacation $5,000 12 3.5% $410.02*
|        

*Future value of an annuity
$5,000 = PAYMENT x [ ( 1 + 3.5% / 12 )12 – 1 ] / 0.035 / 12
PAYMENT = $410.02

In this example, assume you want to take a short vacation 12 months from now and you estimate the cost will be $5,000. If you place your money in a short term savings account paying 3.5% (after-tax), you will need to save $410 per month to save enough money to go on vacation.

If you complete the worksheet for all of your anticipated future spending and investments, you’ll have an idea of how much you will need to save. Some common items that would appear on the worksheet include:

  • Down payment for a home
  • Appliances
  • Retirement
  • Education
  • Vacations
  • Major appliances

What Happens If My Savings Aren’t Enough?

If your savings are enough, you need to make some changes. Even if your savings are enough, you can still make changes to your plan to better position your self in the future.

PAY YOURSELF FIRST! Treat your savings as a fixed expense and ensure your own financial security. This will help you avoid going into debt if there is an unforeseen future expense (such as a major appliance replacement). Paying yourself first and saving will also help you address cash flow problems identified in your cash flow plan.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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