Savings Snowball

I use a savings snowball philosophy. In an earlier post, you saw my savings goals for 2011:

1. Max out my Roth IRA – done in early April.

2. Max out my Roth 401(k).

3. Bump my emergency fund up by $4,000.

4. Save $3,000 towards a car replacement in 10 years.

5. Save $20,000 towards a down payment on a house.

Goals explanation

Maxing out my Roth IRA is the first priority. This means that all available savings room each month and on each bonus goes towards maxing out my Roth IRA until that’s completed.

Maxing out my Roth 401(k) happens each month – I calculated the percentage of my gross income that needs to be saved each month to do that, set that number on my 401(k) custodian’s site, and left it alone. (Well, except when I got a raise – then I was able to lower that percentage a bit to still max it out over the course of the year.)

I want to have the savings to buy a house in 2015. Now, I don’t know if I will actually psychologically want to buy a house or not, but I would like to have the funds there just in case. Before I buy a house, I want to have a 12 month emergency fund. My emergency fund is $16,000 short of that, so each year for the next 4 years, I will snowball $4,000 into my emergency fund.

I want to buy a new car in 10 years, so each year I will snowball $3,000 towards that. That way, when it is time to replace my car, I will be able to pay cash. Also, at $3,000 per year, if I need to replace my car in 7 years, then I could buy a $21,000 car.

My last goal is to save for a down payment on a house. This goal is last because it has a more flexible time limit on it than the other ones. For example, if you don’t max out your Roth IRA or 401(k) in a year, that contribution room is gone. That is not the case with my house down payment fund. I am also flexible on the time frame when I will actually buy a house.

Why a savings snowball?

You might be asking, if I have the income to save this much each year, why would I do a savings snowball instead of putting $X aside per month for each of the goals.

Well, just like people trying to get out of debt, I like being able to cross amounts off of a list and say that I am done for the year!

I get about 20-30% of my year’s gross income in irregular amounts and dates. My monthly budget is less than my monthly net income, but considering that you take the 401(k) contributions off my paycheck, that doesn’t leave a lot of savings room each month.

It is nicer psychologically and easier to track if I am (mostly) only putting savings towards one goal each month. Then, when I see an irregular amount of income on an irregular date, I can throw all of it at the goals that haven’t been crossed off the list yet and in the process, hopefully cross off one or two goals.

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  1. #1 by youngandthrifty on May 21, 2011 - 10:19 am

    Interesting concept! I’ve heard of debt snowballs, but not saving snowballs.

    Sounds like you have some great concrete goals, I’m sure it will be a breeze tacklingthem since you seem so organized :)

  2. #2 by Jeff @ Sustainable Life Blog on May 22, 2011 - 7:50 pm

    Great concept – I like that you focus on the things that will go away if you dont take action (roth ira and 401) and leave the other things that will always be there towards the bottom!

  3. #3 by Suzanne on May 23, 2011 - 3:29 am

    This is interesting, had to take a few minutes to visualize the savings buckets to get the concept. One question, by Roth 401k you dont mean the one from work I can put $16,500 in per year right? That would be a heck of a snowball. I am thinking your snowball amount is $1500 ish a month (based on the roth ira max of 5k you have already reached by April). So confuses how you will max out the 401k and still have $ for the other buckets?
    Again, I like this idea, I am still in debt snowball but when done (soon!) will think about this strategy.

    • #4 by leightpf on May 24, 2011 - 7:18 am

      Yes, that’s exactly what I mean by Roth 401(k)! I save about $2,800 per month. I also see irregular amounts of income a few times a year that I throw entirely at my savings snowball. I have a pretty high income and I am good at saving.

      Congrats on almost being done with your debt snowball! I thought the idea of being able to say “YES! I’ve paid off this debt, now onto the next” was so powerful (I do love checklists), that I applied it to savings and it’s been great. It’s really amazing to be able to check off some goals early in the year, rather than checking them all off at the end – way more motivation!

  4. #5 by Tvo on May 31, 2011 - 5:58 pm

    I love this article! It is quite refreshing seeing someone that has the same exact goals that I do =) My main goal is to max out my Roth IRA and I hope to finish that goal in a couple of months. I’ve been dollar-cost averaging my 401k and I should max that out in November. I am also putting a small amount away per month to rebuild my emergency fund. I had to replace the tires on my car and replace the fridge at my living area this month. Therefore, the fund has taken a slight hit. Lastly, I am trying to build up a down payment for eventually a one-story house. I am bookmarking this site =D

    • #6 by leightpf on May 31, 2011 - 9:00 pm

      Thanks Tvo! I agree – it is quite nice to have very similar goals to someone :) I find that it is difficult to talk about finances with friends who have very different situations or goals. A down payment for eventually a one-storey house is exciting! I still see that as reasonably far off for me (at least 5-10 years), but I am saving towards it anyways.

  1. February 2012 net worth update (+1.2%) « Leigh's Financial Journey
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