The Savings Snowball

The other day, while running some errands with Mrs. PT, I had one of those light bulb moments. She wasn’t initially impressed (she’s my highest hurdle), but I was impressed with myself. The idea: a savings snowball.

It works similar to how the debt snowball works. Except you aren’t snow-balling debt payments; you are snow-balling savings (e.g. emergency funds, vacation fund, holiday gift fund, retirement accounts).  So, if you aren’t currently tackling debt, or if you’re content with the low interest debt that you have (like we are), then you should be working on a savings snowball.

After a quick search of the Interwebs I realized that my idea wasn’t new (cue sad trombone). Many others have tackled this “savings snowball” concept before. Regardless, I haven’t talked on the subject, so I thought I’d give it a go anyway. After all, you guys are looking for my spin on things anyway.

The savings snowball is simple. First, list out all of your savings goals. This can include immediate goals (next week or month), short-term goals (< 1 year), mid-range goals (1 to 5 years), and long-term goals (> 5 years). The second step is to list your goals in the order in which you need to achieve them.

The third step is to start making all your extra savings deposits towards the first goal. Continue making the “minimum” deposits into all your appropriate accounts (e.g. 401K matching). Finally, once you achieve one goal, move to the next. Repeat this step until you’ve reached all of your savings goals.

The concept of savings goals isn’t new. But prioritizing them and systematically “knocking them out” is. The idea here is that with a prioritized list and a system, you’ll more easily stay motivated to save. As you build savings in each of your accounts, the process will compound upon itself (like a snowball), and you’ll be more likely to achieve all of your goals. It’s a psychological thing.

While the debt snowball can be achieved within a year or two, leaving you left to move on to bigger things, the savings snowball stays with you each year. Next year, you’ll probably go on vacation, you’ll want to max out your Roth IRA contributions, you’ll want to save for the holidays, etc. Savings goals are achieved, and then they reappear the next year.

Another point to make here is that with savings, unlike with debt, there is no interest factor. Therefore, you don’t need to have the money as quickly as possible. You need to have the money just in time. Therefore, once your savings goal date is known (e.g. November 15th for holiday savings) then you can create automatic savings withdrawal or direct deposits to get you there on time.

There is no sense in getting there quicker. By the way, in case you can’t tell from other posts I’ve written, I highly recommend automating and separating your savings effort. So, even if you have a snowball system written out on paper, the actual savings effort can take place automatically and safely using the best that today’s technology has to offer.

Our current savings snowball includes:

• Boost to Emergency Fund – $25,000 – Due 12/31/2011 – We have a decent emergency fund. It would work fine for a family with two working spouses. But that’s not us anymore. My wife is a full-time Mom and I’m self-employed. We need a stronger emergency fund. Another $25,000 would have us breathing easier.
• 2011 SEP IRA Contribution (my business) – TBD – Due 12/31/2011 – This is going to be my whatever is left retirement account for 2011. It will be my first time contributing to a SEP IRA, and with my variable income, I’m just not sure what I’ll have ready to contribute. One thing I do know is that I’ll be making this contribution by the end of the year so that these funds count towards my 2011 limit.
• Future House Down Payment Fund – $50,000 – Due 4/15/2012 – We are considering a move in the near future. We’d possibly like (need) to hang on to our current place as a rental. Thus, we’d need to build another down payment fund. I’ve set this for $50 (a lofty goal), which would comfortably get us there.
• 2011 Roth IRA Contributions – $5,000/each – Due 4/15/2012 – Finally, we’ll need to make our 2011 Roth IRA contributions by tax time next year. This is a now brainer. It’s the low hanging fruit and something we’re committed to doing each year.

What about you? Are you currently working a savings snowball?

photo by gluemoon