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Guide to Savings Plans

What Savings Plans Are & How to Create One
Susan Guillory
Susan GuilloryUpdated March 6, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
A smart savings plan can help you achieve your financial goals, such as building an emergency fund, going on vacation, or making a down payment on a home. While tackling large money goals can seem overwhelming (especially if you feel like you’re living paycheck to paycheck), starting a savings plan may be easier than you think. The key is to start small and make it simple.What follows is a step-by-step guide to setting up a savings plan that will work with your current income, budget, and savings goals.

What Is a Savings Plan?

A savings plan is a strategy for amassing money in order to meet specific financial goals. Typically, the plan is customized to fit your income, how long you have to save, and how much you can afford to commit to savings.Why is it important to have a savings plan? Without a plan, you might only occasionally throw some money into your savings account and may find it difficult, if not impossible, to accumulate enough cash to afford the things you want to buy or do in the future. A personal savings plan allows you to gradually work toward your goals without even thinking about it. It also ensures that your spending aligns with your priorities. Simply identifying your goal (say a trip to Bali or new flat-screen TV) can actually motivate you to find ways to cut back on unnecessary expenses so you can reach your goal sooner.Recommended: How Much Does the Average American Have in Savings? 

How Do Savings Plans Work?

There are all different kinds of savings plans, but the process typically begins with an assessment of your current financial situation and how much you can afford to set aside each month. From there, you set some clear, measurable financial goals, along with a timeline and a monthly savings amount. You then choose a place to keep your savings and automate the saving process.

Types of Savings Plans

Saving is often considered separate from investing. With saving, you typically add money to a bank account, while investing typically refers to putting your money into the stock market. Generally, bank accounts are better suited for short-term financial goals (things you want to be able to afford in the next few months to a couple of years), whereas investing is ideal for longer-term goals like retirement or your child’s college education.For your short-term savings goals, you may want to consider one of these types of savings accounts.Recommended: Brokerage Account vs Savings Account 

Traditional Savings Account

Traditional savings accounts (also called regular savings accounts) are available at brick-and-mortar banks and credit unions. Savings accounts at banks are typically insured up to $250,000 per depositor, per bank, by the Federal Deposit Insurance Corporation (FDIC). Savings accounts at credit unions are similarly insured by the National Credit Union Administration (NCUA).While it’s easy to access your cash with a traditional savings account, you may be limited to six withdrawals or electronic transfers per statement cycle (not including withdrawals made at an ATM or teller). While the Federal Reserve lifted the six-withdrawal limit rule on saving accounts in April 2020, many banks still impose these limitations.The interest rate on a savings account is usually expressed as an annual percentage yield (APY). The APY offered by a regular saving account will typically be low compared with other savings products. Some banks also charge monthly fees.Recommended: Checking vs Savings Accounts 

High-yield Savings Account

High-yield savings accounts — typically found at online banks — work just like traditional savings accounts, except that they generally offer higher APYs. Since online banks don't have to pay for the expenses that come with a physical building, they can often afford to pay you higher rates. Typically, there are no monthly fees. Online banks are just as safe as brick-and-mortar banks, provided they have FDIC insurance. You might still be limited to six withdrawals or electronic transfers per statement cycle, depending on the bank. You can link an online high-yield savings account to a checking account you may have at a traditional bank. Online banks also usually offer access to fee-free ATM networks.

Money Market Account

Money market accounts are savings accounts that offer some of the features of a checking account, such as a debit card or paper checks. You can find them at either brick-and-mortar banks or online institutions. Online money market accounts will often pay higher APYs and charge lower fees than a traditional money market account.Having check and/or debit card access to the account makes it easy to access your money in a pinch. This makes money market accounts worth considering for emergency savings.Money market accounts typically have higher minimum deposit requirements than traditional or high-yield savings accounts, and may also require a certain minimum balance amount in order to earn the higher APY.

Certificate of Deposit (CD)

A certificate of deposit, or CD, can be a good savings tool if you don't need to access your money right away. With a CD, your money is locked up for a specific term that could range from three months to five years or longer. In return for reduced liquidity, CDs generally pay a higher APY than most regular savings accounts. Plus, that rate is fixed — it won’t go down (or up) for the term of the CD. Your funds are safe if they are FDIC insured, but should you need to withdraw your money before the CD has matured, you’ll incur an early withdrawal penalty.You can open CDs at both brick-and-mortar and online institutions. 

Pros and Cons of Savings Plans

Putting money aside in a savings account has numerous benefits, but there are also a few downsides to consider.

Pros

  • Earns Interest Although APYs on savings accounts tend to be low, these accounts allow you to earn some money just by letting your money sit in the bank.
  • Easy access While there may be limits on the number of withdrawals you make per month, you can access your money quickly and easily. Many institutions will let you link your savings account to other accounts, like a checking account, allowing you to quickly transfer funds from one account to another. 
  • Safety If you have a savings account at a bank or credit union that is a member of the FDIC or NCUA, you can’t lose your money (up to $250,000) even if the institution were to go out of business.
  • Liquidity The money you keep in a savings account is cash, which means you don’t have to worry about selling investments or making other complicated moves to access your money.
  • Low startup requirement Many savings accounts can be started for just $25. Some institutions allow an account to be opened for as little as $1, so you can begin saving with even a modest amount.

Cons

  • Minimum balance requirements Some savings accounts have minimum balance requirements in order to avoid monthly maintenance fees or to earn the promised APY.
  • Relatively low interest rates Even high-yield savings accounts may not pay enough interest to outpace inflation, which means the money you put in today could be worth less a year from now. If you have a long-term goal like retirement and can handle some volatility, investments like stocks or mutual funds may be a better choice.
  • Monthly withdrawal limits Though the federal rule on withdrawal limits has been lifted, many banks impose a fee if you exceed six withdrawals or electronic transfers per month.
  • Easy access While this is listed as a pro, it is also a potential con. If you have trouble resisting temptation, being able to get to your savings easily could make saving more difficult.

How to Create a Savings Plan: 5 Steps

Setting up a savings plan to meet your financial goals doesn’t have to be painful or complicated. Below, we break it down into five easy steps.

1. Determine How Much You Can Save

If you have a monthly budget, then you may already have an idea of how much extra money you have available to save each month. If you don’t, you may want to first add up your monthly income and subtract your monthly expenses to calculate how much you can realistically afford to save each month. If there isn’t much (or any) wiggle room, you may need to find ways to cut your non-essential spending. This will free up some cash you can then siphon into savings.

2. Set Some Savings Goals

Next, you’ll want to think about your savings goals — things you need or want to save up for in the next few months or years. If you don't have an emergency savings fund (with at least three to six months’ worth of living expenses), that can be a good first savings goal. If you already have a safety net, you may want to think about other goals, like going on vacation, paying for a wedding, or making a downpayment on a home. If your budget allows, you can work on multiple goals at once. For each goal you set, you’ll want to determine how much you will need and when you will need it. From there, you can determine the exact amount you need to set aside each month to reach your goal.Recommended: Guide to Wedding Saving Accounts

3. Decide Where to Keep Your Savings

Once you have your goal (or goals) in mind, the next step is to determine the right place to keep the funds. If you’re saving for emergencies, for example, you’ll want to choose an account that is easily accessible but still earns a high APY. A high-yield savings account or money market account could work well. For a savings goal that is six months to a few years off, you might consider a six-month or multi-year CD. You won’t be able to withdraw the money during the CD term, which could help you stick to your saving plan.

4. Automate Your Savings

It can be a challenge to remember to put money aside each month, so consider setting up an automatic debit from your checking into your savings account. You can typically set up automatic transfers by logging into your account online and linking your checking and saving accounts. You might want to set it up so that on each payday a specific amount of money is moved from checking to savings. This ensures the money is put aside before you have a chance to spend it.

5. Level Up Whenever You Can

Even after you have your savings plan in place, you may want to look for opportunities to give it a boost. If you get a cash gift, tax refund, or bonus at work, for example, consider putting it right into savings. If you receive a pay raise, you might want to up the amount you automatically transfer to savings. This will help you meet your goals faster.Recommended: 52-Week Savings Challenge Guide

Different Things to Save Money For

You can save for virtually anything. Here are some short-term savings goals you may want to consider:Recommended: Guide To Christmas Club Savings Accounts

Choosing the Right Savings Plan for You

There are all different ways to set up a savings plan. You might open a single savings account to house all of your savings. Or, you might want to set up different savings accounts for different savings goals and name each one, such as "Emergency Savings" or "Car Fund." Some banks actually allow you to create different savings “buckets” within one savings account to help you work towards different goals simultaneously.  

The Takeaway

A savings plan is a road map for achieving your financial goals, which may include saving for emergencies or making a downpayment on a home. The process involves determining how much you can save, setting goals, choosing the right savings account, then setting up automatic transfers.Once you set up a savings plan, it’s a good idea to review your plan regularly so you can gauge your progress and make any adjustments when necessary. Watching your balance go up can also help you stay motivated and committed to your plan. Interested in finding the best rate for your savings? Lantern by SoFi can help. With our online banking marketplace, it’s easy to compare high-yield savings accounts based on APY, fees, and balance minimums.Lantern can help you compare online savings accounts and find today’s best rate.

Frequently Asked Questions

Which savings plan is best?
How do I start a savings plan?
How do you start saving money?
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About the Author

Susan Guillory

Susan Guillory

Su Guillory is a freelance business writer and expat coach. She’s written several business books and has been published on sites including Forbes, AllBusiness, and SoFi. She writes about business and personal credit, financial strategies, loans, and credit cards.
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