How Does a Savings Plan Work?

Determining Contribution

Savings plans can be started for a variety of reasons--including preparing for college, saving for retirement or wanting to accrue interest on extra cash. The first step in a savings plan is to define the terms of the plan. Owners of plans must decide how much they want to save and how often they want to add to the plan. If the owner is setting up the savings plan with a bank or other financial institution, she will usually meet with an advisor to devise the most logical savings plan.

Complete Transfers

Once the basic structure of the savings plan has been determined, the owner must complete the monetary transfers. Many companies allow their employees to automatically have certain amounts of money taken out of their weekly paychecks and put into special retirement or health savings plans. Often, this withheld money is not subject to taxes. In addition, many banks offer scheduled savings plans in which the bank will automatically transfer a certain amount of money from a person's checking account into his savings plan on a regular basis. For people setting up savings plans by themselves, they will manually transfer cash between accounts.

Withdrawing Funds

When the terms of a person's savings plan end, the total funds plus accrued interest are typically transferred to an account of the owner's choice. If the owner wishes to withdraw cash from a savings plan prior to its maturity, there are typically fees associated with the transfer. Retirement and college savings plans help customers to progressively save extra cash for a time when the money will be most needed.