It’s never too late to start building your savings account. A five-year savings plan is widely recognized as a beneficial way to grow your wealth, whether you’re starting from scratch or want to earn more from your existing savings.
Key highlights
- A five-year savings plan can help you achieve a variety of savings goals, whether you’re saving for a specific purpose or simply want to grow your wealth.
- Different savings accounts provide different benefits and features, such as fixed or variable interest rates and multiple ways to access your funds.
- Longer-term fixed-rate bonds typically have the lowest interest rates.
Why a five-year savings plan is essential
When you have a goal in mind, it’s usually a good idea to plan out how you’ll get there. This method is particularly useful for increasing your savings. A savings plan should keep you on track and allow you to track your progress. Because increasing your savings is a long-term project, having a five-year plan can help you set realistic goals and stay committed to achieving them.
Many people’s financial priorities have shifted in the aftermath of the coronavirus pandemic. Unemployment has risen dramatically, raising concerns about savings and income.
Save for the things that matter
When it comes to what you need to save money for, it could be anything from a rainy day fund to being able to take that trip you’ve always wanted to take.
How to achieve your savings goals
Five years may seem like a long time, so it’s critical to understand exactly how to reach your savings goals. Here are some suggestions:
Be specific
Having a clear goal in mind from the start of your five-year savings plan will help you stay motivated and focused. Your goal may be to start a retirement fund, save for a down payment on a house, or ensure that you are well-prepared to deal with any unexpected financial shocks.
Begin by setting a reasonable goal that will not put you in a difficult financial situation. Having a specific amount in mind will make it easier to take the next steps, such as selecting the best savings account for you and deciding whether to deposit a lump sum or make monthly contributions.
Create a timeline
A five-year savings timeline may allow you to take advantage of competitive interest rates, but you should consider whether five years is enough time to meet your goal.
Choose a savings account that’s right for you
Before you begin saving, take a look at your finances to see if you already have a lump sum that you can grow or if you need to start from scratch. If you’re starting from scratch, you’ll need to examine your budget and determine how much you can afford to set aside after covering your essential outgoings.
There are numerous types of savings accounts to choose from, each with its own set of benefits and features, with the best interest rates often taking precedence. Comparing the following types of savings accounts will assist you in determining which one is best for you.
Fixed-rate bonds
Fixed-rate bonds typically offer competitive interest rates in exchange for locking your money away for a set period of time, and the rate will not change from the day you open the account to the day your term expires. This means you’ll be able to estimate how much interest you’ll earn before you open the account.
Easy access
With an easy-access account, you can have much more flexibility than with a fixed-rate bond while still earning competitive interest rates. A typical easy-access account allows you to deposit and withdraw money at any time, making it ideal if you’re just starting to save or don’t want to commit to locking your money away.
Notice accounts
Notice accounts are a good compromise between fixed-rate bonds and notice accounts because they can be opened with a lump sum deposit but can only be accessed by giving notice. Notice periods are typically between 30 and 90 days, and a notice account can be kept open indefinitely.
What could a five-year savings plan look like?
You may be wondering why you would choose a five-year savings plan or how it could help you achieve your savings goals.
A good way to answer these questions is to calculate what a five-year savings plan might look like based on current market rates and where this is likely to get you, depending on how much you can afford to save and whether you already have any savings.
These five-year savings plan examples will show you how you can save over this time period.
Example 1
Assume you have no existing savings and cannot begin your five-year plan with a lump sum deposit. After reviewing your monthly expenses, you discover that you can afford to save $250 each month in an easy access account.
Variable interest rates are available with easy-access accounts. When you open your account, the interest rate is 1.2% AER (Annual Equivalent Rate), but it drops to 0.4% after a year, meaning you’ll have earned $7 in interest after five years.
At that point, you might consider opening a fixed-rate bond to earn a higher rate of return on your money, making it work harder for you. According to current trends, it is better to save your money for the long term in order to earn a higher return.
Example 2
You have $3,000 in cash that you can use to open a savings account. You must also deposit $150 each month. If you deposit this initial amount plus $150 per month into an easy access account with an AER of 0.4% for five years, you will earn $170.
Example 3
You already have a $10,000 savings account. If you invest this in a 5-year fixed-rate bond with a 2.1% interest rate, you will earn $1050 over the course of the five-year term.
When deciding which savings account will help you reach your goal, consider whether the interest rate is fixed or variable. By selecting a fixed rate savings account, you will benefit from a fixed rate of interest for the duration of your term, so you will know exactly how much interest you will earn.
Don’t risk volatile savings account rates
With savings account interest rates so low, you may be wondering how you can stick to a five-year savings plan and achieve predictable results. If you have a lump sum to deposit, the simplest way to save without worrying about fluctuating interest rates is to open a fixed-rate bond. A 5 Year Fixed Rate Bond will usually provide the most competitive interest rate, and there will be no rate changes during that time.
