What is a savings plan?

At one point or another during your personal finance journey, you will probably ask yourself the following: is it better to save or to invest my money? And how much money should I save and how much should I put aside for investing? The answer depends on your individual financial situation, and we will break down for you how you can tackle both. 

Saving vs. investing

If you’re on the fence about whether you should be saving, investing, or both, it’s important to understand the benefits and drawbacks of each.

Having a savings account is an essential part of good personal financial planning. Life can be unpredictable, so whether or not you’re saving for a specific goal, it’s a good idea to have money saved up in case you need to cover any unforeseen emergency expenses.

While regularly paying into your savings is a smart idea, the drawback of savings accounts is that your money “just sits there.” Though your money will accumulate interest over time, unfortunately it won’t be that significant. On top of that, your funds could be at risk of inflation, i.e. you could actually be losing money over time. Inflation can quite literally eat away your hard-earned money. 

What is cost averaging?

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 means that you invest smaller amounts of your money into an asset, such as Bitcoin or gold, in regular intervals and keep doing this over a longer period of time. This way 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.

How to create a savings plan

Now that you better understand the difference between saving and investing, you’re ready to create a savings plan. The first step is to consider your financial goals and then to figure out how much money and time you will need to reach those goals. If, for example, your goal is to save for a €100,000 deposit on a new home, then you should calculate what percentage of your income you want to set aside each month and then how many months or years it will take you to reach that amount. Or let’s say you want to invest 10% to 15% of your annual income in the stock market. If you earn 50k a year after deductions, you could make it your financial goal to save at least €500 per month. This works out to be roughly 12% of your monthly income. 

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Short term savings plans

A short term savings plan usually spans a timeframe of up to five years. This is a good amount of time to work towards big-ticket purchases like a car or a wedding, or to venture a first foray into investing. You could for example beef up your savings account by auto-depositing 20% of your income every month, or you could allocate 10% to 15% of your income to investing. You could also split them evenly and send 10% of your income to savings and use the other 10% to invest.

Medium term savings plans

A medium term savings plan lasts between five and ten years. A goal could be saving up to buy a home by depositing a part of your income into a savings account. Just remember that keeping your savings in a bank will put them at risk of both inflation and 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.