Two months ago, when I paid off my credit card, I came up with a savings plan for my newly freed-up money. In case you don’t remember, or haven’t read that entry, the idea is very similar to a debt snowball. Rank up savings goals in priority order, save a set amount toward each of them every month, and throw any extra savings money at the goal at the top. Once the top savings goal is reached, start throwing all extra money at Priority #2.

Here’s what my Savings Snowball looked like when I made it in August:

Two months later, here’s what things look like:

Some things you might notice:

Textbooks: I put more aside than I originally planned. As I was saving, I was also buying the textbooks for my first term of the year, and the bill was higher than I expected. So I put some extra cushion room into this account.

Student Loan Interest: This is now the main focus of the snowball. I’ll tell you, I never would have thought I’d make this much progress in only two months! I’ve been acting like a squirrel, hiding nuts for the winter. Soon my income will dry up a bit (it always does in November/December), and I’ll be glad I got a head start on my savings before then!

Getting Established Fund: I wish there was more here, but that’s the nature of the savings snowball - this doesn’t get focus until my student loan interest is taken care of. Still, things are on the right track, so I’m not too concerned.

Emergency Fund: If this number looks high, it’s because I already had it started before the savings snowball. Also, it’s fed by sources other than just the snowball!

Future Car Fund and Retirement: Chugging along! Once the student loan interest is done, I plan to increase the minimums for these. Maybe. It depends on how things are going at that point.

Flexibility

My savings snowball might not be perfect, but it doesn’t have to be. If at some point I decide, for example, that I wish I had put more toward Getting Established than other goals, I can yank money out of the other savings accounts and move things around. Nothing about this is set in stone.

Some people think I should put more toward retirement sooner. Or that my emergency fund goal is too high. Or that I shouldn’t work on anything except my emergency fund. But it’s working for me, for now, and I can move any of the money at any time, as long as it’s all just sitting in different savings accounts.

Which is the beauty of the savings snowball.

What do you think? Do my goals need adjusting? Are you ready to start a savings snowball of your own?

If I had to come up with one nice thing to say about credit card debt, it would be this: at least it gave me focus. Paying off that high-interest debt as quickly as possible was a clear-cut Priority #1 goal. Now, I’m a little lost.

I can see right here why people my age have trouble with finances. What’s important? What should I do first? What do I need to focus on? Where do I go from here? It’s easy to shove it all aside and think “I’ll just deal with it later.”

But that’s the worst thing I could do. Even if I don’t pick the exact right thing(s) to focus on, pushing toward any financial goal is better than cooling my heels and blowing all of my extra cash. Even just “saving” without purpose is better than nothing.

If just “saving” is a flashlight in the darkness, then saving with a goal is a Super Trouper beam. So, it’s time to find my new goal. Or goals. So what’s on the table?

Debts

Down to just one… ish. My student loans. These are very complicated: some of them are accumulating interest while I’m in school, and some are not. Some of them I haven’t taken out yet! 6 more months of school and I’ll be at my final balance of around $40,000.

Savings

Emergency Fund: Growing. All of the money I get from ING referrals feeds into this. I’m not going to make it a huge priority just yet, since it’s growing and I have a credit line of $6,000 between my two cards to fall back on in a real emergency. I’m not ignoring it, but it’s not at the top of my list.

Textbook Fund: Going back to the question I asked earlier in the year – is it a better idea to pay off a bunch of my student loan interest, and getting a bigger new loan to cover the cost of textbooks, or should I get a smaller loan, pay for textbooks out of pocket, and possibly only be able to pay off part of the interest before it capitalizes?

I ran the math, and it’s better to pay for the textbooks out of pocket. I’m putting aside the money this month, and hopefully I can get good enough deals to not have to use it all! Any money that’s left in the fund will get rolled into a different savings goal.

Getting Established Fund: Just six months until I finish classes and hit the real world! I’m not sure exactly what I’ll be doing, but if it involves moving out of my parent’s house and paying for my own space, then a “getting established fund” will be hugely important. First month’s rent/last month’s rent/security deposit? Oh boy, I think this fund is the most important of all.

Future Car Fund: My car won’t last forever. The dreamy environmentalist in me wants to live someplace where I don’t need a car, but the small-town girl in me hates cities! Realistically, I’ve probably got at least one car purchase in my life, so I’d better get saving for it. I’d adore never having a car loan in my life!

Retirement Fund: Compound interest! It seems like time to think about starting a Roth IRA while my tax bracket is rock-bottom and my credit card debt is gone. But should this take a back seat to the things listed above? What good are retirement savings if I have to go into debt to get textbooks or pay a security deposit?

I could go crazy trying to decide between all of these things. But really, the only thing to do is rank them up and make a savings snowball! Basically, I’ve got to come up with a minimum I want to save for each goal each month. Then any extra savings I come up with beyond those amounts, I put toward the goal at the top of the list. Once I complete the first goal, it comes off the list, and everything below it moves up one. Goals are reevaluated, and the process continues…

Savings Snowball

Ok, I know, this list looks really wonky right now…

No monthly minimum for textbooks? Because it’s on top – priority #1 doesn’t get a minimum, it just gets everything I can afford thrown at it, after the minimums are paid for the other goals.

Only $10 a month into the Emergency fund and the Car fund? Well, those are low priority compared to the student loan and the Getting Established fund – both of the latter goals have a deadline within a year, so they need some major focus.

Retirement as the last priority? Only because the goal total is infinite, so it will never snowball down into anything else. The $5 a month is really just to start a habit, right now. I’ll increase the monthly minimum as my circumstances change.

What do you think? Am I doing it wrong? Am I doing it right? The beauty of a savings snowball (that you don’t get with a debt snowball) is that most of the money is just going into savings accounts, where it can be moved around if I change my mind about things. But I want to know what you guys think!

A reader by the name of Slinky came by and left a comment on the site:

I’d love for you to post about pros/cons of storing an emergency fund in different places - online savings, money market, index, brick and mortar, etc.

The key to figuring out where to stash your emergency cash is decide what type of emergency you’re preparing for. Many people save “3-6 month’s expenses” in their emergency fund, in case they lose their income for a few months. Other people have emergency funds for sudden incidents, such as car repairs or a medical crisis. Some people keep cash in case of a natural disaster, where banks and ATMs might not be available.

What’s the difference here? “Liquidity.” Liquidity simply means “how easy will it be for me to get the money I need, fast?” Different accounts give varying levels of liquidity - and usually the less liquid your fund is, the higher rate of interest it will earn.

Cash

Under a mattress, in a fireproof safe, or in a sealed envelope on your person - cash is about as liquid as it gets. Cash is good if you’re the type that would use your fund in a natural disaster.

Pros: Instantly useable, accessible during a power outage

Cons: Loses value over time due to inflation, is inaccessible if you’re not physically near it (if it’s in your fireproof safe and you’re out of the house, for example), little recourse if it’s stolen, temptation to spend on non-emergencies

Brick-and-Mortar Bank Savings Account

The savings account at your local bank or credit union could be the place for your fund. It’s highly liquid - you can get the money out by walking into a branch, using your ATM card, or instant transfer to your checking account at the same bank.

Pros: Easily accessible, less temptation to spend than cash

Cons: Low interest rate usually doesn’t keep up with inflation (loses value over time), may be inaccessible while traveling if bank is local

Online (High Yield) Savings Accounts

One of the most popular places for emergency funds right now, online savings accounts offer the sweet spot of liquidity and interest rate. The funds can be transferred to your checking account within 1-3 days. Recommended account: ING Direct’s Orange Savings.

Pros: Interest rate usually meets or beats inflation, transfers to checking account, separation from checking decreases temptation to spend, no minimum balance requirement

Cons: Slow transfers may hinder urgent emergencies, limited by federal law to 6 transfers out of the account per month

Money Market

A money market savings account is a lot like a high yield savings account, without the “online” part. They pay a comparable interest rate to online savings accounts, sometimes even higher. Also, they let you write a few checks a month on the account, assuming the check is for $250 or more (usually).

Pros: Interest rate usually meets or beats inflation, transfers to checking account, ability to write checks for emergencies

Cons: Limited number of checks can be written per month, minimum balance requirements could be a problem if you have to use all the money in the emergency fund

Index Funds

Index funds are just a collection of stocks that follow the stock market. Low liquidity and high volatility - some people use index funds to grow the value of their emergency fund, but it’s a risky practice because your fund could take a nose-dive in value right before you need the money for an emergency!

Pros: High interest rate, low liquidity virtually guarantees you won’t spend it on non-emergencies

Cons: Really inaccessible (you have to sell the funds to get the money), could lose value when you need it most, could virtually disappear during economic crisis

Extra: Credit Cards

Many people keep a credit card around for emergencies. In my opinion, a credit card is a compliment to an emergency fund. You use the credit card to pay for the emergency, and then use the money from an emergency fund to pay off the credit card balance.

Pros: Emergency fund that is easily accessible and as big as your credit line, accepted by nearly every retailer and some medical facilities, ability to “pay now” and then pay off the balance with money from your real emergency fund

Cons: Temptation to overspend or use for non-emergencies, usually not usable in the case of a power outage

My Recommendation

Use a combination of these options to get the benefits you need. For example, If you’re in hurricane or tornado territory, having part of your emergency fund in cash is a good idea, as well as having some in a high yield savings account.

Personally, I’m using a credit card/online savings account combination right now. After I graduate from college and grow my emergency fund, I’ll move most of the fund to a money market savings account, and perhaps keep a couple hundred dollars in cash as well.

The sign-up period for getting a $25 bonus when opening an E*TRADE Complete Savings Account ends on October 31st. Since the referral email can take up to a week to send out, this is really your last chance. If you’re interested, contact me, and leave the email address you want the referral email sent to.

One note: since they started this promotion, E*TRADE has dropped the rate on this account down to 4.7%. This isn’t something to worry about - many banks have done this since the Fed rate adjustment. 4.7% is still a really, really good rate on a savings account, considering the nation average is something like .25% (yes, POINT 25 percent, not 2 point 5 percent!).

You can also just leave a comment on this entry saying you want a referral - just make sure you use the email address you want the referral sent to!

ING referrals have moved here: $25 ING Referrals. Sorry about the inconvenience, but it was a bit of a pain to upkeep two pages of referral links!

I’ve had a high yield savings account with E*TRADE since February, and it ranks as one of the best high yield savings accounts, in my opinion. At the time I opened it, they were offering a $25 bonus to go along with their 5.05% APY on the account. They’ve stopped offering that bonus to the public.

However, I got an exciting email from them. They’re offering me the opportunity to offer you the $25 bonus for opening the account, as well as giving me $10 for each one of you that signs up! Yes, this is an awful lot like the ING referrals that you see everywhere, except for a few differences:

• E*TRADE’s APY for this account is 5.05%, higher than ING’s 4.5%.
• The minimum deposit to open the account and get the bonus is $1, unlike ING’s $250 opening deposit (to get their bonus).
• This is a limited time offer. You have to get it before 10/31/2007.

There are no fees on this account, if you were wondering. No low balance fees, no annual fee - nothing like that. I’ve had just over $6 parked in it for several months, and it just sits there, racking up interest!

Interested? Leave a comment on this entry, and be sure to use your first and last name and email address. I can only send invitations to this via email, so that’s why I’ll need you to leave your email address. If you’re not comfortable leaving your first and last name in the comments, you can contact me through email instead.

If you’re not comfortable giving me your first and last name, you can try using a fake name. But I am not responsible if this gives you trouble when you try to open the account - do this at your own risk!

You can check out the terms of the E*TRADE Complete Savings Account, but remember that if you apply directly on their website and not from my email, you will not receive the $25 bonus!

I’m doing something I never thought I’d do: I’m going against “The Math.” “The Math” tells me that I should aggressively pay down my credit card as quickly as I can, throwing every spare penny at it. “The Math” says that because the interest on my card is nearly 18%, and my savings accounts only earn about 5%, that my money is better spent on that credit card balance.

And for several months, I’ve been listening to “The Math.” And it has, up until now, served me well: I’ve managed to get my credit card debt down below 75% of my limit. This isn’t great, as far as my credit score is concerned, but it’s a definite improvement.

But “The Math” does not know all, and it’s time for a change. A temporary change. I’ve reduced my credit card payments to the minimum plus $1. Why the minimum plus $1?

1. It looks better on my credit report, because it doesn’t show up as “the minimum payment.”
2. It makes me feel better, because I’m not making “just the minimum payment.”
3. It brings the payment up to a nice, round $40, which appeals to my number-based brain.

And the money that was previously earmarked for my credit card is now headed for my newly formed emergency fund. I want some security. I don’t want to worry that my car is going to break down and I won’t be able to pay for it.  I don’t want to panic if my income drops one month. And I definitely don’t want to have to borrow more money if I hit a rough spot.

But “The Math” shouldn’t worry - I’ll be back for that credit card debt soon enough.

Update: It appears that Citibank has dropped this offer down to a $50 bonus instead of a $100 bonus. Everything else in this post still applies, however.

A few months ago, Citibank offered a $100 bonus for opening an “Ultimate Savings Account” with them. I snapped at the offer, even though the accounts 4.75% APY is slightly lower than many online savings accounts. And now, Citibank is handing out this $100 bonus offer once again.

If you interested in an easy $100 like I was, you might be interested in what I learned from my experience:

~ You need to have never held a bank account with Citi before in order to qualify for the bonus. As far as I know, this refers to checking and savings account, but not credit cards.

~ The account is pretty standard as far as online savings accounts go. There is no minimum balance required and no monthly fees. I used $1 as my opening deposit and just left it there.

~ They ask for an awful lot of information when you’re opening your account. It’s been a few months, but I seem to remember having to run out of the room to track down paperwork and look things up. Also, they will do a hard credit pull (a credit check that will slightly lower your credit score for about a year).

~ The offer says the bonus may take as long as 90 days to appear in your account. I recommend marking your calendar three months from the day you open it, and if you don’t receive the bonus by then, to start writing some emails or making some phone calls. My $100 took 45 days to appear in my account.

~ The current offer expires on 8/31/07, so if you’re planning to take advantage of the offer, be sure to apply for your account before that deadline (probably at least several days before, just to be sure).

Now that my $100 bonus is finally in my account, I’m going to buy a Wii! Just kidding. I’m probably going to let it sit in the account for as long as I can, let it earn a little interest, and then throw it at my debt. Yep, I’m boring and practical like that.

[Hat tip to Jonathon at My Money Blog for pointing out Citibank renewing their $100 bonus offer.] 

When I was six years old, I started my first business. My favorite book character, Karen from the Babysitter’s Little Sister series, started her own newspaper in book #40. Things went badly for Karen, but I was determined that I could do it too - and do it better.

And I did. For over six years, I ran my own newspaper. In it’s heyday, the “Kids Gazette” was sold in five stores across my town, and had three writers working under me. In addition to selling the paper in stores for 25 cents, I also sold ads in each issue. And I made $30 and issue, which was pretty much a fortune to me. I paid out 10% of each issue’s profits to each writer that contributed that month. And life was good.

But I didn’t save any of the money. And I haven’t the slightest idea what I spent it on. I didn’t even save up the money for the thing I wanted most at that age, an American Girl doll (although, now that I’m 20 years old, I realize it would have only taken me three months to do so). That money didn’t even seem to last from one issue to the next.

But what if it had? What if I’d saved all that money? Or what if my mother had matched my profits in an account somewhere? Where would I be today?

Ok, so, I wasn’t exactly consistent with my newspaper, so we can say that I probably made $30, six months out of the year, for 1993-1999. So $180 a year, for seven years.

Likely scenario:
I shoved all the money in a shoebox. In 1999, it would have totaled $1260. At that point, I had my own savings account. So let’s say I put it in there when I stopped the newspaper, and then never touched it till today. My savings account earns 0.2%. So I would have $1277.75 today, to do with as I wish.

Err… well that’s great, and I certainly would appreciate having nearly $1300 today, but only earning $17 in interest over 7 years is really kinda awful. So, what if we had done even better?

Less likely scenario:
Each year, the money was deposited in a CD or money market account, earning 5%. Again, after 1999, I contributed nothing else. Today, that would be $2062.19.

Well, now we’re getting somewhere. $800 in interest is nothing to shake a stick at. Now, I could certainly run the numbers at 8% interest, and 10%, but I think you already get my real point here: Any which way, I would have a lot more money now.

The real question, I suppose, is whether I (or my mother) would have put aside this money when I was so young, if someone had just run the numbers. Can a child (or even a parent) be persuaded to save, just by being shown how it really adds up? And why didn’t anyone run the numbers for me 14 years ago? … And what did I buy with all that money, anyway?

Two friends separately contacted me yesterday with the same question: “I have a full time job now… what do I do?” (They both play the trombone too, it’s kinda eerie.) I understand where they’re coming from. With a sudden influx of money comes this daunting feeling that you should really take control of your finances. But… how?

I’m going to give you guys a warning, though: if you came looking for the sexy answer, you’re barking up the wrong blonde blogger. I’m not going to give you a one-liner like “invest in gold and you’ll be set for life!” Sorry, but I’m going to give you the real down and dirty (that sounds sexy too… but it’s not).

Step 1: The Fun Part
Estimate your income. This is easier to do after your first paycheck, because then you can see exactly what percentage they’ll be swiping up for taxes. But even if you haven’t received that first paycheck yet, estimate away. You can adjust it later.

Step 2: The Depressing Part
Estimate your expenses - a new jobs means they’ve likely changed. I recommend you download and use PearBudget - it’s a free, really easy to use program that runs in Excel. Or, at least use the Pear way of dividing up your expenses:

Regular expenses: monthly expenses that don’t change in amount. E.G. Rent, car insurance, cell phone bill, savings…
Irregular expenses: “things that come up a couple of times a year that you know you need to budget for. For example, you know you’ll spend about $1,800 on car maintenance over the year, but you won’t pay it on a regular schedule. So you budget $150 every month into “Car Maintenance,” and then, on some sad day, you’ll have to give the mechanic all that money.” Other examples: gifts, travel…
Variable expenses: monthly expenses that vary in amount. E.G. groceries, dining out, gas for the car…

Step 3: Try Not to Faint
Take your estimated income for one month, and your expenses for one month… and hope that the first one is larger than the second one. Actually, if you included savings in your expenses, they should be the exact same number. But, they probably aren’t. So… “what do I do…”

“…if my income is more than my expenses?”
In all seriousness, this is a question you would probably never ask me. But if you truly estimated all your expenses accurately, and you came up with this, then you do have a problem. I know at least one of you has some hefty credit card debt playing the monkey on your back. And you need to deal with that. For serious!

Don’t put anything more on those credit cards. Not a red cent. Go cut them up, now. I know, I’m a mean Stephanie, and I don’t want you have any fun. Deal with it. Don’t charge anything else until you’ve paid them both off. (Hey, at least I didn’t tell you to sell your trombone!)
Use that extra cash to really, really work on paying down that debt. I’m assuming it’s high interest, and it’s definitely dragging your credit score down at this point. Just remember, if you only make the minimum payments, it’ll probably take you upwards of 30 years to pay off those cards. I don’t know about you, but I certainly don’t want to meet up when you and I are 50+ and find out that you’re still paying off some charge from 2006.

And if you don’t have any nasty credit card debt? Pump up your savings, and feel mighty proud. Also, know that I hate you.

“… if my expenses are more than my income?”
Ouch… but this was always a likely scenario. You’re going to have to cut down an expense. And no, don’t go for the savings first - that’s like sticking a knife in your own jugular. I’m not going to tell you what expenses you should trim, because I know you’re smart, and you’re the one that has to live with the decision. Find some fat, and trim it.

Make sure you do put away some savings, though. Even if it’s just a dollar a week, get in the habit. It takes about 3 months to establish a weekly habit, so by then you’ll have over $12 (whoopee!), but more importantly, a good habit for life.

Step 4: Just Do It
Live your life, track your expenses, adjust PearBudget (or your tracking system of choice) as you go along. There really isn’t any secret formula - in fact, I’m rather sure there wasn’t anything here that you didn’t already know… somewhere in the back of your mind.

Oh, and about that savings: make sure you’re putting it somewhere that beats inflation, like a high yield savings account. You know how much I love ING Direct (aff), but so long as you’re saving, I’m happy.