How To Set up a Savings Snowball
I’d like to talk about something that I’ve gotten excited about recently: setting up a savings snowball. The idea is to focus on one thing at a time and put everything toward that till you reach your goal. The only difference is that (due to the miracle of compound interest) a savings snowball can work even faster than a debt snowball.
What are the steps?
First, make a list of your savings goals. Maybe you want to save for a trip to Italy. Maybe you want to fully fund your IRA this year. Maybe you want to save for a down payment on a house. Or for Christmas gifts. Whatever your goals, list them out in order. You can go from smallest to largest if you’re motivated by reaching goals quickly. You can go from most urgent (saving up an emergency fund) to least urgent (that trip to Italy). You can go from short-term to long-term or anything in between. The order is up to you.
Second, set up the interest-bearing account(s) you’ll need to fund your goals. You should be able to transfer money to these accounts electronically as often as you want to without incurring any fees. (I use ING and HSBC savings accounts for short-term goals, and as a landing spot for money earmarked for mid-term goals.) If you’re worried about the safety of online banks, recognize that FDIC insurance means that they’re just as safe as brick-and-mortar banks. UK banks (online or offline) can provide the same sort of protection.
Third, set up an automated savings strategy. Have x amount of money transferred automatically toward your first savings goal each pay period? First. Before you buy anything else or pay a single bill. Also, arrange for a minimum amount to go toward each of your remaining savings goals each month.
Finally, keep at it
Every single time you have some extra money, get online and send that money to the first item in your savings snowball. Right then. Don’t wait until the end of the month to see “what you have left”. Don’t wait for it to be a certain amount or an “even” amount. Do it right away, even if it’s only $1.37. When the monthly statements come showing your new balance, celebrate every penny of interest that you’ve earned and every dollar that you’ve contributed. After a few months, you’ll notice that the interest accumulates at a faster and faster rate. That’s when you’ll know that your snowball is rolling.
If I want to fully fund my IRA this year, why not just set up automatic payments for that? Seems like it would more or less be the same, except that the money is getting in the market directly instead of going through this other interest bearing account.
The interest bearing account was an example of an account you could set up if your first savings goal was to save for a trip to Italy (or something along those lines). Guess I didn’t word things right. But anyway, yes if your goal is fully funding the IRA, the automatic payments would go right to that.
This is exactly what I do as well; and I agree with you that “snowball” can also be used in the context of saving. I used this term early on when I met my husband, who was $70k in debt, had 0 savings, and knew absolutely nothing about finance. Well, he’s learned alot since that day, and will be the first to tell you that for him the “snowball” analogy helped him to “get it”.
We used this exact strategy and rolled our debt snowball into our savings snowball once we had eliminated our consumer debt.
This is the exact same method known as the “Pay Yourself First” principle, where you would allocate a portion of your income each month aside for your financial wealth building, except in this case, you are generalising the use of the amount that is being set aside.
This method however, takes some discipline to follow through in long term.