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:

Priority	Name	Goal Total	Monthly Minimum
1	Textbooks	$400	All extra $$
2	Student Loan Interest	$1,500	$50
3	Getting Established	$2,000	$50
4	Emergency Fund	$10,000	$10
5	Future Car Fund	$10,000	$10
6	Retirement	Infinite	$5

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

Name	Goal Total	Progress	Monthly Minimum
Textbooks	$400	$495	Done!
Student Loan Interest	$1,500	$584	All extra $$
Getting Established	$2,000	$100	$50
Emergency Fund	$10,000	$382	$10
Future Car Fund	$10,000	$25	$10
Retirement	Infinite	$26	$5

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

Priority	Name	Goal Total	Monthly Minimum
1	Textbooks	$400	x
2	Student Loan Interest	$1,500	$50
3	Getting Established	$2,000	$50
4	Emergency Fund	$10,000	$10
5	Future Car Fund	$10,000	$10
6	Retirement	Infinite	$5

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!