I manage my savings the same way many people manage their debt: with a “snowball plan!” If you are not familiar with snowball plans, they work like this:
You list out all of your debts (or goals, in my case) in a priority order, each with a minimum payment that you have to contribute each month. Then, you take any extra money you have each month, and throw it at the goal on the top of the list, until that goal is entirely eliminated.
Once the top goal is gone, you contribute everything you can into the next goal on the list, and so on and so forth, your monthly payments “snowballing” and growing as you move down the list.
Here’s my Savings Snowball, with my progress back in January and now at the middle of October compared side by side:
|Emergency Fund||$3,183||$2140||$3175||All that I can|
|Future Car Fund||$10,000||$2,192||$175*||$50|
*Car fund: That’s $175 and a new car, mind you!
Alright, not bad. Definitely some real growth happening — especially that retirement contribution!
The Future of the Future Car Fund
This was a point of debate (with myself) just after I bought my Camry in July. Should I keep contributing to this account? Or should I be putting that money toward the auto loan that I just took out in order to get the Camry?
The math lends itself in favor of paying off the loan: I have a higher interest rate on the loan than the interest rate I earn on the savings account. But the straight interest-rate-for-interest-rate math doesn’t tell the whole story.
The rate on the car loan is only 1.99% — less than what inflation is usually calculated at. And my student loans have comparably much higher interest rates — above 5%. If I have extra cash, it should be going toward paying those down. And of course, if we’re taking all interest rates into account, then we have to take the expected interest rate on my retirement contributions, which is even higher still than 5% student loan interest.
So really, I shouldn’t be saving for a new car, paying off my auto loan, or paying off my student loans at all — extra cash should all go into a retirement account and that’s that. Right?
But if I did that, there’d be no snowball. And there’d be no new cars, no traveling, no charity contributions, no weddings… because a goal that’s more than 40 years off still would be taking precedence based on its interest rate alone, which is just silly.
So I continue to contribute to the new car fund — not because the math supports it (it obviously doesn’t) but because of the simple fact that in 10 years or less, I will be car shopping once again.
Changes to the Snowball
I can’t do an update without doing some tweaking. It’s just my nature. So here goes!
Emergency Fund Goal +$1,817
Even though I’m within $10 of my previous Emergency Fund goal, I’m not stopping now! My rent was just raised, so the previous goal wouldn’t really cover 3 months of living expenses any more. It’s time to bump the goal up to a solid $5,000.
Travel Fund, Minus Space Camp
I’m not as excited about going to Adult Space Camp as I once was. I purposefully missed registering early because I wasn’t so sure anymore. They also seem to have removed the week-long adult program, and are only offering the long-weekend version. So this fund will now be for more non-specific travel, until another opportunity comes up.
Weddings Monthly Payment +$50
The number of weddings I’ve been attending (and traveling for!) has only been increasing. Everybody gettin’ married up in here! That’s why this fund’s “progress” has gone down — I’ve taken more out to attend weddings and buy gifts than I’ve managed to put in!
But I love attending the weddings of my family and friends, so the answer is simply to contribute more each month — that way, I can keep on going.
Retirement Monthly Payment: GONE!
I had to think this one through for a while, but I will hit my goal of $5,000 in contributions this year, without any further contributions. Wait, WHAT? How does that work?
First, I had to define what “contribution” means. I decided a few years ago to measure my progress on this goal by my own contributions to my retirement accounts, not the total account balance. I didn’t want to punish or reward myself for the swings of the stock market.
Secondly, do the contributions I make straight out of my paycheck (and the match from my employer) count as “monthly payment” for the purposes of this snowball? I decided that since they come straight out of my paycheck with no effort on my part, this answer is “no.”
With those definitions in mind, I will hit my $5,000 goal for 2012 in November with just my paycheck deductions. So I’m done for the year! The monthly payment on that goal is suspended until January!
Occasionals — Removed
My “Occasionals” account is where I keep money for regularly occurring (but not monthly) bills, like my annual renters insurance or my semi-annual car insurance. Though I still plan to fully contribute what I need for these bills to this account every month, it’s not really a “snowball” goal. I have no reason to increase it beyond the exact amount required to pay those bills.
With those changes, and a little rearranging on the priority of some goals, the Savings Snowball now looks like this:
|Name||Goal Total||Progress||Monthly Payment|
|Emergency Fund||$5,000||$3175||All that I can|
|Future Car Fund||$10,000||$175||$50|
A leaner, cleaner snowball plan with refreshed goals! We’ll revisit again in January, when I restart my monthly retirement contributions and reevaluate everything else.