How to build a savings plan (and how much to save each month)

What is a savings plan?

A savings plan, in its simplest form, is a concrete goal tied to a regular habit. It is not "I want to save more." It is "I want to put together €20,000 in 5 years, and to do that I set aside €X a month". The difference is turning a vague intention into a number you can track month by month.

Every plan has four pieces that fit together:

• The goal: how much you want to save and by when (a house deposit, an emergency fund, retirement).
• What you already have: the starting balance you begin from.
• The interest rate: how much the product where you keep the money earns.
• The monthly contribution: the amount that ties everything else together, and usually the unknown you want to find.

Once the first three pieces are set, the fourth falls out of the maths. That is exactly what the savings calculator does: given the goal, the time frame, what you already have and a rate, it shows the monthly saving needed to get there.

How do I set a realistic savings goal?

A good goal is specific and has a date. "Saving for retirement" is a direction; "putting together €20,000 in 5 years for a house deposit" is a goal you can plan and measure.

Before medium and long-term goals, it is worth having an emergency fund: a reserve worth a few months of expenses, kept in an easy-access product, for the unexpected¹. It is what stops you having to unwind other savings (or turn to credit) when a surprise cost appears.

With the goal and the time frame set, the practical part remains: how much that is per month.

How much should I save each month?

This is where the maths comes in, and it is simple. The monthly saving needed depends on four things: the goal, the time frame, what you already have saved and the interest rate.

The formula that ties it together is the future value of a series of payments, solved backwards (instead of "how much will I have?", it asks "how much do I need to put in?"):

Monthly saving = (Goal − Initial × (1 + i)ⁿ) × i ÷ ((1 + i)ⁿ − 1)

where i is the annual rate divided by 12 and n is the number of months. If the rate is 0%, it simplifies to (Goal − Initial) ÷ months.

You do not need to do this by hand. Enter your figures in the savings calculator and see the monthly saving needed straight away, and how much of that effort ends up coming from interest rather than your own pocket.

The 50/30/20 rule: where to start

If the question is "what slice of my income can I save?", a popular reference is the 50/30/20 rule, which splits net income into three buckets:

• 50% for needs (housing, food, transport, essential bills).
• 30% for personal spending (leisure, eating out, subscriptions, extras).
• 20% for saving and debt repayment.

It is not a rigid rule and it does not suit everyone. In areas with expensive housing, 50% can be unrealistic. But it is a good starting point for setting a savings amount and then seeing which goals that amount makes possible in the time frame you want.

Where should I keep my savings?

Where you keep the money sets the interest rate you use in the plan, and how much of the goal interest does for you. The choice depends mostly on the time frame and the risk you accept:

• Short term (up to ~2 years): favour easy access and guaranteed capital. A term deposit or a savings account are common options.
• Medium term (~2 to 5 years): capital-guaranteed products still make sense; in Portugal, Savings Certificates are a popular alternative.
• Long term (more than 5 years): some accept more risk in exchange for higher potential returns, because time helps smooth out the swings.

Whatever you choose, one principle never changes: always compare the expected net interest with inflation. With inflation around 2% over the medium term in the euro area², money left fully idle, earning nothing, loses purchasing power every year.

The effect of time and interest

The most underrated piece of a savings plan is time. The earlier you start, the smaller the monthly saving needed, for two reasons: there are more months to add up the contributions, and there is more time for compound interest to work on what you have already put together.

The same goal, with more years to run, needs a much smaller monthly effort. Delaying the start has the opposite effect: the clock works against you and the monthly amount needed goes up.

Worked example

Suppose you want to put together €20,000 in 5 years, you already have €1,000 saved and you count on a 2% annual rate:

• The monthly saving needed is about €300 a month (€299.69, to be exact).
• Over the 5 years, you contribute around €18,981 from your own pocket.
• Interest adds over €1,000, the difference that gets you to the goal without having to save that amount.

Extend the time frame to 8 years and the monthly amount drops sharply; cut it to 3 and it rises. You can test your own figures (goal, time frame, starting balance and rate) in the savings calculator and see the result instantly.

Common savings goals

A plan works for any goal that has an amount and a date. The most frequent ones are:

• Emergency fund: the equivalent of 3 to 6 months of expenses, kept in an easy-access product. It is usually the first goal, because it is what protects all the others¹.
• A house deposit: often 10% to 20% of the property value, over a 3 to 7-year horizon (the kind of goal used in this article's example).
• A car or a holiday: short-term goals, where guaranteed capital and quick access matter more than returns.
• Children's education: a long horizon (10 to 18 years) that benefits greatly from the effect of compound interest.
• Retirement: the longest-horizon goal, and the one where starting early most reduces the monthly saving needed.

For each one, the method is the same: set the amount and the date, choose where to keep the money and use the savings calculator to find out how much to set aside each month. Several goals at once? Treat each as a separate plan and add up the monthly contributions. That way you see the total effort and can adjust time frames if it is too high.

How to keep the plan alive

A plan only works if it is followed. Three habits help:

• Automate the saving: schedule a transfer to your savings account the day after payday. The money leaves before it is spent.
• Review it once a year: goals change, income changes and interest rates change. An annual review keeps the monthly number matched to reality.
• Start small, but start: a modest contribution today is worth more than a big one "when I can", because of the time it gains.

Setting the goal, working out the monthly saving and choosing where to keep the money are the three steps that turn the wish to save into a plan you actually follow, and the savings calculator handles the middle step for you.