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Make your savings ‘snowball’

By Paula Pant · Bankrate.com
Wednesday, February 19, 2014
Posted: 6 am ET

Today, I'm going to take some traditional savings advice and give it a different spin.

Traditional advice says you should make a list of savings goals and the amount needed to reach those goals. You also need to establish a time period – in months – for achieving each goal.

Then, you divide each goal total by its monthly deadline to get a snapshot of the amount you need to save.

For example, in the traditional approach, you might list the following:

  • New dishwasher: $500 within 12 months ($41.67 per month)
  • Vacation: $3,500 within six months ($583.33 per month)
  • Holiday gifts: $700 within 11 months ($63.64 per month)
  • Graduation weekend: $250 within six months ($41.67 per month)

In this scenario, at the start of your process, your total savings would be $730.31 per month.

This sounds reasonable enough, and the strategy works for many people. Such savers set up separate savings accounts, with each one earmarked for a specific goal.

Those savers then fund these goals through automatic deductions from their checking account to their savings accounts.

An alternative approach

The traditional strategy works great -- if you can stick with it. But if you are coming up short in meeting your goals, here's an alternative you may prefer: Try focusing on one goal at a time.

This strategy is inspired by best-selling author Dave Ramsey, who encourages people to take a "snowball" approach to paying down debt. This same principle can be applied toward savings goals.

Under this approach, you fund each goal until it's entirely maxed out. Then, you shift focus to a second goal. This helps cultivate a sense of "winning," which can increase your motivation to save.

The best way to start this strategy is to max out your smallest savings goal first. For example, knock out each goal in the following order:

  • Graduation - $250
  • Dishwasher - $500
  • Holiday gifts - $700
  • Vacation - $3,500

At a savings rate of $730 per month, you'll knock out the first two goals (graduation and dishwasher) within a month. That will give you the psychological thrill of victory, which will keep you motivated.

In the second month, you'll knock out the third goal (holiday gifts). And from the point forward, every dime will go toward your vacation.

You may be so motivated by this that you'll increase your savings rate.

Of course, before you tackle these savings goals, it is best to earmark a healthy percentage of your savings toward an emergency fund and your retirement plan. But after doing so, use the "snowball method" to keep you motivated to save more.

Paula Pant helps people ditch the cubicle and live on their own terms. She's traveled to 30 countries, owns six rental property units and hasn't had an employer since 2008. Her blog, Afford Anything, is the gathering point for a tribe that refuses to say, "I can't afford it." Follow Paula on Twitter: @AffordAnything.

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1 Comment
JRW
February 19, 2014 at 12:14 pm

Why on earth would you save for something you want a year from now before things you want 6 months from now?

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