Looking Forward: The Savings Snowball

I have heard and read a lot about the debt snowball method. You pay your lowest balance debt first and work your way up until you pay it all off. This is a great method that I used myself to pay off my own credit card debts. I believe we should take it one step further: the savings snowball.

The basic idea is the same but there are some slight tweaks to it. We all have a list of goals to accomplish. A lot of them require money and a lot of savings to cover them. Here is what I propose as the "Savings Snowball" method:

  1. Make a list of financial goals and prioritize (ie retirement, kid's college, emergency fund, etc)
  2. From your budget see how much cash flow you have left each month to dedicate to savings
  3. Come up with a monthly amount for each item. 
  4. Start saving money towards each goal in order.
I recommend putting the emergency fund first. I also recommend putting all savings toward that emergency fund until you reach the target. Plans fall apart fast when you have a financially burdensome emergency and no money to cover it! Next I would put retirement. We have to live and eat after we stop working so that is the next most important. All goals after that can be in the order you wish.

The idea is simple. You put all your savings toward an emergency fund. When you finish you do not stop! You take your monthly savings amount and put it towards retirement. If you have enough to cover your retirement needs you move on to other goals. As they become funded you keep moving down the list. Chances are you will never run out of goals!

This idea is not as simple as the debt snowball but works off of the same principal. The major factor that has to be determined first is how much you will need to retire and how to invest your savings to meet that goal. This varies widely for everyone and sometimes professional help is best here. Once you establish "I need to save $X per month for the rest of my working days to retire" you can work out all the other numbers on your savings snowball. It all falls into place after that!

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