27 Jan 2010

6 Easy Steps to Save Quicker

May be you've already heard about a Snowball debt re-payment model. You are using a snowball when you first through all your available resource to pay off the debt with the smallest amount and once it payed off you use all money that became availble to pay the next one in the row.
Now, yesterday a friend of mine shared her approach to saving. What she does is
pretty similar to the debt repayment snowball. I found the idea great and wanted to share it with you.
  1. Identify an overall amount you can afford to save
  2. List all your saving goals starting with the one that needs to be saved for first, at the top of your list
  3. Assign minimum saving amounts to each goal apart from the top one on your list 
  4. The minimum amount per goal is a sum of money that you will pay into the goal no matter what
  5. Any extra money that you can find (windfall, saving on bills, etc.) paid towards the first goal on the list
  6. Once your top goal is reached, you will take all the money you now don't need to saving towards the goal and start saving it towards the next goal on your list.

Now, you might have spotted one problem with this approach - you probably have two different type of saving goals:

  • saving goal with a defined end date and amount in the near future (car, down payment, holiday, etc.)
  • goals that lie very far in the future and have an infinitive amount (e.g. retirement, investment per se)
So, where in that list would you place those infinitive goals and how to go about the fact that you actually can't achieve them?

And that what I've asked my friend to explain to me. What she does is quite clever, she places the "infinitive" saving goals on the bottom of her list as they actually can't be reached (you will aspire to pay in into your retirement saving pot regardless of how much is already in their) and they stay their forever.

So, for example, my saving snowball will look as follows:

Date By
Total Amount
Monthly Payment
Christmas & NY
New Car
Emergency Fund

So, right now I need 10 months to save for Christmas and NY but I could put any extra money I may get during the year towards this goal, and, let's say achieve it in only 5 months. Than from month 6 I will start paying at least 135 towards my next goal on the list and put any extra money towards this goal as well.

I wonder if anyone else ever tried this method? It looks quite appealing to me as it organises my goals into a nice hierarchy and gives me a feeling of greater control and achievement. But, I wonder, if there is a mathematically superior way of saving?

Would really appreciate your thoughts and experiences!
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The Rat said...

I think your're right in that having defined goals with defined dates are crucial in saving money.

Nice post!

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