Use The Savings Snowball Method To Save More, Faster

I recently responded to a post by Jane from Cash Fasting. If you haven’t read her blog, check it out. There is a lot of fantastic content, and you’re bound to learn something new. She was summarizing goal progress for Q1, 2017. She has many financial goals that she is trying to accomplish at once. This sounds very familiar to people who have many debts that they are trying to pay off at once. Unfortunately, it can be very difficult to accomplish several savings goals at the same time. This got me thinking, why don’t we apply the same strategies that we use to pay off debt to achieving financial goals?

The Debt Snowball Method

We’ve all had problems paying off our debts at some time or another. I’m still paying off my car loan. I had to pay off $15,000 in student loans. Some people have student loans, car loans, credit card debt, and mortgages to pay off. Managing all of these payments is not trivial. If you are lower income, you have probably felt like you will never escape from your debt. You’re lucky if you can pay your debt minimums and put food on your family’s table.

The Snowball method helps solve this problem. Basically, you pay the minimums on all of your debts. Any additional money goes towards the smallest debt. Once you pay that off, you take the extra additional money plus your old monthly payment, and apply it towards your next smallest debt payment. In no time, you’ll be completely paying off your debts. In fact, this is the the best way to pay off your debt. But is this strategy only for paying off debt? What if we use this optimization and apply it to our savings goals?

The Savings Snowball Method

The Debt Snowball method really helps many people escape from their debt. Yes, it is technically sub-optimal when you compare it to the Avalanche method; however, it compares well when you look at overall success which is what we should care about. Why shouldn’t we apply this to our goals? Can we actually treat our savings goals like debt, and optimize achieving these goals quickly while maximizing success? Let’s run through an example.

Let’s meet Alice. Alice has 4 primary financial goals:

  1. Add $3,600 to her emergency fun
  2. Save $1,200 in her Roth IRA
  3. Pay off $4,800 in credit card debt (at 0%)
  4. Pay as much as possible of their mortgage off

These goals are very common to most households. Everyone can probably have a bigger emergency fund, contributing to retirement is important, most people have credit card debt, and paying off a mortgage can help out your cash flow. Looking at these goals, Alice needs to save $9,600. This is $800 a month, a very tall order!

Luckily, Alice can afford this, but barely. After paying off all of her necessities like food, she contributes the minimum to each of these goals, with a little bit extra each month. This means $300 a month for her emergency fund, $100 a month for her Roth IRA, $400 a month towards credit card debt, and $0 additional towards her mortgage. If she sticks to her plan, she will hit her goals. As we all know, sticking to a financial plan is difficult. Little things always come up to sabotage your plans.

Let’s say that Alice has an extra $100 per month in spending money, and she receives an additional $100 a month in bonuses from work. She decides to take this $200 extra per month and throw it at her Roth IRA. This means during the first 4 months of the year, she will put $300 a month towards her Roth IRA which means she will accomplish her goal by the end of April. For May, she takes this extra $300 and throws it at her emergency fund, which she is now contributing $600 a month. A few months later, she will pay off her emergency fund early and now throw the additional $600 towards her credit card debt. This also gets paid off before the end of the year. Now, there is a month or two left in the year, and she can contribute to her fourth goal of paying extra towards her mortgage. She will be able to pay an extra $2,400 towards this.

Save More, Faster

This is the exact same strategy that you use with the Debt Snowball method. You “choose your battles” and pay off the smallest debts faster, so all of the good feelings associated with success push you to work harder. This directly applies to your financial goals. Alice definitely felt great about achieving her Roth IRA goal, and she was able to use this success to push her to achieve her next goal. In addition, it lets you pick harder goals. If you don’t believe this, consider the following: would you rather accomplish 1 goal every 2 months for a year, or accomplish 6 goals on the last day of the year? If you accomplish smaller goals every other month, it is very easy to keep going. If it takes you an entire year to achieve any goals, well, we all know how those New Years Resolutions go.

I’ve actually been doing this for awhile, I have minimum contributions for my house down payment fund and Roth IRA. Extra money goes towards my Roth IRA, and I’m going to max it out by the end of summer. I’ll use this extra money to supercharge my house down payment savings. Would you be willing to try out the Savings Snowball method to help achieve your financial goals? If you are, let me know and I can help you prioritize where you should direct the additional savings.

Good Hunting,

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6 Responses

  1. James says:

    Great topic and lots of food for thought. My experience has been, at the end of the day, any approach to debt reduction or reaching savings/investment goals can work. The key? Taking the time to develop and work your own plan. Everyone’s goals and the factors that must be considered will be different. Success comes to those who take the time to educate themselves and develop a specific/detailed plan for achieving financial freedom.

    • David says:

      Thank you!

      Any plan is better than no plan (unless your plan is terrible). As long as you develop your plan so that it aligns with your goals, you will do better than if you hadn’t done anything.

  2. This is really worth putting some thought in to. My student loans are the only debt I have left now. I want to build a small emergency fund and I’m not sure where to start first. I’m currently just letting cash pile up in my account while I think on it. I never thought I’d pay my credit cards off as fast as I did. On top of that I’m thinking of opening a RobinHood account.

    Mo’ money, mo’ problems!

    • David says:

      If you are drowning in debt, the general rule of thumb is build up a $1,000 emergency fund and then figure out a debt payment strategy. This is where you can decide to do the snowball or avalanche method. If you aren’t drowning in debt, you should add building an emergency fund to your debt payoff strategy. Figure out the minimum that you need to contribute to your e-fund, and then just apply snowball or avalanche. If you are really risk averse, pay off the minimums on your debts and build your e-fund as quickly as possible. Honestly, everyone has some optimal strategy that works for them, and they love to tell you why it is best. Figure out what works for you and put the blinders on.

      As for how to actually do an emergency fund, I really like online banks that offer both savings and checking accounts. I have a 0.955 APR online savings account that is my e-fund. It is connected to a checking account that I have physical checks for. If something comes up, I can write a check and just transfer.

      With respect to investing, I would recommend investing with tax-advantaged accounts first if possible. I personally use Fidelity because my old employer used it. All of the major brokerage firms let you make an account for free. In addition, each one has specific ETFs/Mutual Funds that you can buy commission free. There are usually at least several of them (Fidelity has about 50), and you can build a very simple 3 fund portfolio very cheaply.

      Good luck with your mo’money, mo’problems!

      • I’m thinking of using Capital One 360 for my efund. I started this month with acorns. I’m just not sure it’s “enough”.

        • David says:

          I don’t have any experience with Capital One 360, but I’ve heard good things. The same goes for acorns, great product but I’ve never used it.

          When you first start out, nothing will feel like “enough.” I can tell you that even what I’m doing now, it doesn’t feel like enough. I can’t stop comparing myself to other bloggers who save better, have more page views, etc. One of the best pieces of advice that I’ve ever read comes from Financial Samurai. He advocates increasing your savings until it hurts. Right now you might not be saving that much. Next month, save a little bit more. The next month, up your savings again. Keep doing this until it hurts: you’ll be amazed at what you can do.

          Good luck!

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