Personal Finance
Lesson 5
4 min

What is a savings plan?

To have a savings plan is important no matter who you are. The reason why we save is because life is unpredictable and saving money can help you become more financially secure, as it provides a safety net in case of emergencies. 

  • You should save a proportion of your income to your savings account

  • It’s useful to try putting money aside for investing 

  • Saving money can help you become more financially secure

In this lesson, you are going to learn about setting up savings plans.

As soon as you start working and earning a steady income, besides setting up your bank account, you should set up a separate account with your bank for unexpected expenses. As you learned in lesson 4, this type of savings is also referred to as an emergency fund. In this article, you are going to find out about the proportion of your income that you should consider saving and how to create a savings plan if you want to start investing. 

Nearly every investor has the same thought: should I save or invest my money? And how much money should I save and how much should I put aside for investing? It all depends on your individual financial situation, but we will break down for you how you can tackle both. 

The inflation risk

The sad truth is, saving your money in a bank may be convenient at first glance. However, your funds could be at risk of inflation, ie. you could actually be losing money instead of earning by keeping your money in a bank. Given that you’re not really earning interest on your deposits anymore, inflation quite literally eats away your hard-earned money. Awareness of this is an important step towards a better, healthier financial life. If done the right way, investing in assets other than just a regular savings account can put your money to work and produce better long term results. This is why many investors choose to set up a savings plan based on the principle of cost averaging. 

Cost averaging as the foundation of a savings plan

On Bitpanda, users can set up a savings plan based on the principle of cost averaging. This means that you invest smaller amounts of your money into a digital asset, such as Bitcoin or gold, in regular intervals and keep doing this over a longer period of time. 

By continually acquiring digital assets over a long span of time, you can reduce the effects of market volatility on assets that are subject to great price fluctuations. 

One of the advantages of using savings plans is that you invest with less emotion. You are happy when the price goes down because you get more for your money and happy when the price goes up because your investment is worth more than before.

Create a savings goal

Before you start saving or set up a cost averaging savings plan, you should first create a rough savings goal. If you’re wanting to start saving for that deposit on your new home, then the best way to calculate the amount is how much you can save each month and how many months it will take you to reach your goal. For instance, you could invest around 10% to 15% of your annual income. For example, if you earn 50k a year after deductions, it could be your financial goal to save at least €500 per month. This works out to be roughly 12% of your monthly income. 

Now you have created a savings goal, you should look at how long you want to save for. This part is very important in defining when you have reached your goal.

 
 
 

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Short term savings plans

A short term savings plan is for up to five years. During this time, a goal could be to save 20% of your income to your savings bank account and to allocate 10 to 15% to investing. For instance, if you set up your savings plan based on cost averaging for less than five years, you are at risk of losses. 

Medium term savings plans

With a duration of five to ten years, depositing cash in a savings account is a popular solution to saving up for buying a home in the medium term. However, you should bear in mind that just keeping your savings in a bank will put them at risk of both inflation and very low interest rates, and you might end up with less money than you planned. 

Long term savings plans

You should definitely consider investing if you are planning on growing your assets over the long term. You may want to look into dividend-paying assets, or if you are averse to risk, set up cost averaging plans for different assets to decrease loss risk through diversification. Historically, investing in securities yields higher profits than cash savings in the long run. Contrary to popular belief, there is no age from which you are too old to begin investing or even to start saving. However, If you’re over 30 years old, you could consider investing towards retirement along with your other investment plans. 

Of course, you can also save and invest on a regular basis without a specific goal in mind.

FURTHER READING 

BOOKS

  • Collins, J L - The Simple Path to Wealth

  • Edleson, Michael E. - Value Averaging: The Safe and Easy Strategy for Higher Investment Returns

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