Are you living with the daily stress of debt hanging over your head? Maybe you have a big investment to make or you want to buy a house in the next few years.
A forced savings plan may be the answer you’re looking for to gain control of your finances. It’s easier than you think to start taking positive steps towards getting out of debt or being able to afford that big purchase.
Read on to learn more about the following:
- How a forced savings plan works
- What are the benefits of having a forced savings plan
- How to start your savings plan
What Is a Forced Savings Plan?
In personal finance, a forced savings plan can also be known as a ‘commitment to invest’. It is a series of automatic transfers that are in place to ensure your savings goals in your financial plan are being met, and your investment strategy continues to run while all the elements of your financial world are accounted for. A forced savings plan can be useful to all people at any stage of their financial journey.
As outlined in the example below, a forced savings plan establishes a savings account that is set up with a completely different financial institution to your regular transaction and spending account. This savings account can be locked if you want to be sure you don’t spontaneously spend or use this money for anything other than its set purpose.
The Benefits of a Forced Savings Plan
The right advice can show you the places in your monthly budget where you can afford to cut back on your spending and keep more of your hard-earned money in the bank. The benefits of putting a forced savings plan in place are many; you’ll notice both financial benefits and psychological benefits to saving money.
The financial benefit is simple – your savings doesn’t simply rely on your willpower or ability to remember what is supposed to happen with your money on any given day. The forced savings plan is set up to do the hard work for you and put your money aside where it can’t be accessed, even before you are tempted to use it for other purposes. This automates your financial strategy – giving you the same benefits as someone who is a ‘good saver’, and may help you achieve outcomes you only expected to achieve if you earned a lot more money!
This means that you have more mental space to maintain your other responsibilities, while having peace of mind in knowing that your savings account or other investments and responsibilities are taken care of. Not only that, you will save valuable time spent sorting out your money or trying to save ‘what is left’, and you’ll have more willpower left over to start to set other goals or make other changes in your life.
The same techniques are recommended when it comes to your regular bills, investment commitments or spending money – allocating it into buckets where it is set aside for a particular purpose gives you control and clarity on where your money is going and what it is achieving for you.
The psychological benefits are also exciting. There is evidence that having a forced savings account results in people saving more over time, while holding yourself accountable, and seeing your savings balance grow promotes confidence, increased willpower over spontaneous spending, and creates a stronger sense of optimism for the future. As well as the discipline and sense of freedom you might start to feel, forced saving gives you the opportunity to approach your money more mindfully and you might find space in your financial life you didn’t realise you had.
How To Get Started On Your Forced Savings Plan
Here are a few effective suggestions to get you started on a savings plan.
Set a Goal and Make It Achievable
To start with, set a savings goal that isn’t out of reach. Maybe it is to be able to save money to afford a new laptop, car or purchase a house. You could set the goal to reach savings milestones along the way – $1,000, $10,000, $50,000. Make sure you celebrate if you reach your goal and reward yourself a little, and then set your next goal to keep your habit going and growing. We recommend not setting too many goals – just set your one main goal – and then let the automatic savings plan do the hard work for you.
Reverse Engineer Your Money
So you can save the right amount of money relative to your expenses, you’ll need to make a budget. Review your previous bank statements, and keep a clear record of your rent, your utilities, grocery expenses, and any other necessary expenses. Don’t forget to include expenses that aren’t as regular – such as car registration, council rates, or other quarterly or annual bills. Next, record your expenses that aren’t as necessary – maybe your subscriptions, eating out or ordering meals, and shopping.
Once you have a clear idea of what you are spending, you’ll know how much is left over to go into savings. You’ll also be able to visualise how much is going on unnecessary spending and where you can cut back to put more into your savings plan. Be realistic when you set your new spending money budget – don’t be too strict straight away and keep some things that bring you joy even if you cut back on unnecessary spending!
That figure you’ve found – the ‘extra money’ left over after bills have been paid and spending money allocated – set this amount to go into your automatic savings plan. Set a transfer to happen when you receive your paycheck – squirrel it away first. Even a few dollars a week will add up over time!
Set & Forget
Having a fixed amount of your salary or regular income automatically transferred into an online savings account is empowering to your whole financial life. To keep yourself from slipping up and splurging on that expensive coffee machine, this should be a separate account from the one you use on a daily basis. Even better if you can monitor your account via an app but without the ability to access or transfer the money easily. Some savings accounts have built-in locks, goals or rewards that might make it even more satisfying!
Consolidate Debt & Eliminate Interest Costs
To make your savings goals even more effective, combine them with a proactive approach to clearing your debt. Credit card debt, in particular, has high-interest fees that can rapidly eat away at your money before you realise it. Loans and credit cards incur monthly fees, so your payments may only be covering the charges and interest, without making a big dent in your balance.
If you have these high-interest debts, your priority should be to pay these debts off first. Take some of that savings plan money and put it towards extra payments off your credit cards or other debts – this is saving you money in interest, so it is very worth it!
Seek advice from a financial expert to see whether you can roll your debts into one loan. This will consolidate the repayments and reduce interest and charges.
Overpay Monthly Bills To Give You A Head Start
Have you ever thought of paying a little extra for each utility or mobile bill every time they fall due? This idea of forced savings is clever and very doable. Consider overpaying your bills by a few dollars each month, and before you know it, you will have accumulated a surplus.
This may mean that eventually, you’ll have a month where the bill does not need to be paid at all, freeing up dollars from that month’s pay for other purposes.
Loose Change Turns Into Dollar Amounts
It sounds a little old-fashioned, but a basic ‘piggy bank’ approach can bring real rewards. Start putting your loose change into a jar or tin at the end of each day. Five cents will become five dollars before you know it. Make a note on the tin about what that money is for – mine is ‘Europe Holiday’ – so you can get excited about what that money will be used for.
Make some of these simple changes to your financial routine, and your forced savings plan will be off and running. Remember to take it slow and adjust it every couple of months until you have a system that works perfectly for you.