Day 11: Designing Your Life with Savings Snowball

Most PF bloggers talk about the legendary debt snowball method but only a few who discuss about savings snowball. Since the method is simple and efficient, why not apply it in other areas too?

The goal of this exercise is to utilise your extra cash efficiently and design the life you wish. By listing your savings goals in order of importance and urgency, not only you will reach the goal as planned, but it will simplify your finance immensely.

Decision, decision...

Some people like to have four different savings accounts and then 10 sub-accounts under each of them. I used to be like that. I had an account for big bills, another for holiday, the other one for cash reserves and finally the last one for the occasional splurge-fest. This is not efficient. You have to remember: money is money. It doesn’t matter in which account you put it, the math won’t lie.

A typical scatter-gun approach to savings looks like this:

Item Monthly Savings
Holiday to Europe $200
Big Bills (insurance, etc) $200
School Fee $100
House Deposit $300
Car Deposit $50
Cash Reserves (I refuse to use the $150
term “Emergency Fund”)
New Furniture $70

Total                                                                                 $1070

While I applaud the intention and action to save money, this approach is neither efficient, well-informed nor simple. The fact that you only see small increases on each item each month is not very encouraging either.

With debt snowball, the payment priority is set on the amount of the debt, from smaller to bigger debts. The savings snowball is slightly different because it is not only based on the amount you need to save, but also based on their importance and urgency. Here’s how you do it using the sample above:

1. List all of your savings goals that include the amount and due date.

2. Importance: obviously, saving for big bills and cash reserves is more important than replacing your furniture (provided that it’s not broken). Is a house deposit more important than a European holiday? It depends on your situation. Going for a holiday before you tie down yourself to a lifetime bliss of mortgage-ville is not always a bad idea; as long as you don’t put yourself into debt for this.

3. Urgency: big bills such as insurance, house rates and car registration have clear due dates so they should be your priority. However, optional items such as holiday and car can be a little tricky. If you find two items that hold the same degree of urgency (which in most cases mean they are not urgent), you should weigh them based on their importance.

4. Once you establish this, calculate the number of payment needed until the due date.

5. Once you make your list, you follow the plan based on the criteria above and move on to the next goal once the more important and urgent goal is completed. The beauty of savings snowball is you won’t get penalised if you don’t contribute to an account. You can instead forgo the less important item such as furniture and put the fund in the big bills account instead.

This is an example how the savings snowball would work:

Total monthly savings fund available is $1070.

As of January 2010 (first payment starts in February 2010)

Importance Item Due Date Number of Amount Monthly
Payment Savings
1 Big Bills (insurance, etc) Jun-10 5 $2,000 $400
2 Cash Reserves Dec-10 11 $5,000 $455
3 Holiday to Europe Aug-11 19 $4,000 $211
4 Graduate School Fee Dec-11 23 $4,000 $174
5 House Deposit Dec-12 35 $40,000 $1,143
6 Car Deposit Jan-13 36 $5,000 $139
7 New Furniture Jan-13 36 $1,000 $28

In the first five months, this person can only contribute to the Big Bills, Cash Reserves and part Holiday accounts. Once he/she completes the Big Bills fund, the $400 can be rolled over to the Cash Reserves fund or even to the Holiday fund. If you have a secure job and family safety net (who can provide you with a roof and food in case of emergency), you could roll the fund to the holiday account and make it happen sooner!! Who wouldn’t want that?

As you do this exercise, you will also find out if the due dates of your goals are realistic. Even better, you might find out that you need to rearrange the level of importance and urgency of some particular goals and design your life accordingly (such as sooner holiday or deferring the car deposit).

You will also be able to get rid of some of your accounts and settle with one or two savings accounts instead. If you already have the list above, you would only need one account to keep your money. Yes, it means that you put the whole $1070 in one savings account and be done with it! I do that with my Cash Reserves, Property Investment and Round the World funds. Stick them all in one account and avoid the headache of sending $xxxx to account XYZ, ABC and DEF each month.

This is just one example of how you do it. Some people like to have one sub-account for each goal because it’s easier to keep track of and visualise. For me, the fewer bank statements to read, the more time I have to plan my next holiday.

4 Responses to “Day 11: Designing Your Life with Savings Snowball”
  1. A great concept! I don’t use it, but I know a lot of people that have an account with ING. They allow you to set up “sub-accounts” so that you can do something like this, though I don’t believe it’s automated or anything.

    Still, visually tracking all your goals is a great way to go.

    • Bytta says:

      Yes, sub-accounts can help to visualise. But living a lean and efficient lifestyle I’m doing now (which I’m sure you endorse :)), I cut them down to two savings accounts (just in case). So much easier to track. At the end of the day, it’s all the same money.

  2. Hi Bytta!

    I like your idea of a savings snowball, and I prefer “cash reserves” to “emergency fund” to. In a previous job I kept track of my program’s budget in a multi-worksheet spreadsheet, and creating subaccounts and moving money around was just a matter of changing a few cells. I don’t see the point in physically having separate accounts for different categories of savings when you can just earmark dollar amounts in your budgeting software.

    • Bytta says:

      Hi David,
      I never like the spirit of “emergency fund” which seems to expect/invite emergencies to happen. Most of them are covered by insurance anyway so I’d rather have my “cash reserves” used to fund my business ideas (after the big trip next year). I think I will need your advice for that 🙂

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