Design a savings plan with milestones

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Anyone who has tried to save for a specific goal knows that it’s easier to fail without well-defined financial objectives. A savings plan with milestones is a powerful tool that can help us reach those goals and also deal with unexpected events. Additionally, it can ensure greater financial stability and security for our household in the short, medium, and long term. While it does require some discipline, the benefits are enormous.

Establishing clear savings goals is essential for creating an effective plan. It’s crucial to ensure these goals are specific, measurable, achievable, relevant, and time-bound to help us reach our financial objectives. In the short term, which could be within 1 to 2 years, our main focus should be building a solid emergency fund. Ideally, we should aim to save enough to cover 3 to 6 months of our monthly expenses. This will provide us with significant peace of mind and the ability to handle any unexpected events or emergencies without having to rely on debt or loans.

In the medium term, which we consider to be between 3 and 5 years, we can focus on saving for a major purchase, such as a new vehicle, a dream vacation, a down payment on a house, or any other significant personal project. It's important to note that this new savings goal is separate from the first one. In other words, while working towards a medium-term goal, your short-term savings for emergencies or unforeseen events should remain intact.

When planning for a long-term goal, which means 10 years and beyond, we need to focus entirely on saving consistently for retirement. Having clear goals over different time horizons is crucial for effective saving.

Once our goals are set, the next important step is to thoroughly analyze our current income and expenses. It’s advisable to keep a detailed record of all your income and expenses for at least one full month. This will help you identify precisely where you can cut unnecessary costs and find opportunities to eliminate minor expenses, ultimately generating a surplus to start saving.

After thoroughly analyzing your income and expenses, it’s advisable to immediately start the habit of "pre-saving". As soon as you receive your salary, wages, or main income, the key is to automatically set aside a percentage for savings. You can do this in a separate account, such as BBVA’s Goals Account, or use tools like 'Piggy Banks,' which allow you to save directly from your own account by earmarking a specific amount of money, without needing to open new accounts. This way, the money becomes unavailable for spending, and you develop a saving habit almost effortlessly.

We can start by automatically setting aside between 5% and 10% of our income. This might not seem like much, but the key is to develop the habit of saving. As we become more comfortable and see the results, we can gradually increase this pre-savings percentage. To help with this, you might find BBVA’s Paycheck Saving rule useful. This feature allows you to transfer a chosen percentage of your paycheck or pension to another account as soon as you receive it.

Once we have successfully built our 3 to 6-month emergency fund, which could be our first major milestone, we should aim to increase our savings contributions to between 15% and 20% of our income. Naturally, these savings should be allocated to your medium and long-term goals, as we discussed earlier.

Once we have achieved our medium-term savings goal, another important milestone, we should focus 25-30% of our income exclusively on saving for retirement. At this stage, it’s worth considering opening a pension plan or exploring other long-term investment vehicles to grow our savings. Another effective strategy is to consider investing a portion of your savings in low-risk options, such as interest-bearing savings accounts or conservative investment funds. This allows you to preserve the purchasing power of your savings and earn a modest return, without taking on excessive risk.

If we are consistent with this plan and remain disciplined, by the time we reach 45 or 50, we could have saved at least three times our annual salary. Consequently, by the ages of 55 to 60, we should aim to have saved around six times our annual salary. If we manage our finances well, by the time we retire, around the age of 65, we should have saved at least eight times our last salary, ensuring a comfortable retirement.

If you find yourself struggling at any point along the way, you can always use BBVA's Financial Health section to track your savings and help you achieve your life goals. There, you'll also find tools to help you save more efficiently. Remember, beyond the numbers, the truly crucial aspect is developing the habit of consistent saving from an early age. Patience, consistency, and a long-term mindset are key.