Savings Snowball

If you've been broke, or you are broke, there's a good chance you have heard of the "debt snowball." I think it's time to apply the theory to savings.

If you're not familiar with a debt snowball, or you've heard of it but never really understood it, here's the quickie version:

Generally, when you have consumer debt, you owe a lot of people various amounts of money, with various minimums and various interest rates. When you try to pay it off and you just send off money here or money there, its hard to see any "real" progress and you can get easily discouraged. You simply don't have the drive to get out of debt. In essence, you are hurling individual snowflakes at your creditors and its causing no reaction at all.

So, what every expert or advice giver pretty much on the planet would recommend is that you list all of your debts, your pay off amounts, your interest rates and your minimum payments. Then, put them in order, and pay the minimums to each one. ANY money you have left over, you pay only to the first creditors on the list. When that first creditor is completely paid off, you add its old minimum to the payment you're making to the second creditor...and so on and so forth until you're all paid off. You can think of it like a snowball rolling downhill, gaining size as you pay off various creditors.

The various experts differ as to WHAT order you put them in. Some say highest interest rate to lowest interest rate, others say smallest overall balance to highest. The idea being you will pay the least money overall if you pay higher interest rates off first. However, you will be most likely to stay motivated if you see results - by paying off low balances quickly.

For myself, I've found, not just in myself, but in my 4 or 5 years frequenting debt message boards and reading others stories, that when you first decide to pay off debt, and to focus intently on that goal, you will have several small balances. Really small. Then, you'll have a chunk of midsized balances, and probably one or two large balances.

In 2005, the first time I listed my debts, I had over $40,000 in debt averaging over 18% interest. I believe I had nine creditors. Of course, I owed Victoria Secret a whooping $14 and JC Penney another $23. I had several creditors (credit cards and doctors bills), with balances between $700 and $2,000, and I had one card with almost $20,000 owed.
When I focused, of course I was able to pay Victoria Secret her money that month, and to polish off JC Penney the next month. After that, it was on to those mid-sized debts, which I attacked in order of interest-rate.

When I read other's stories, I see this same pattern repeated over and over. Someone with $5000 in debt, and 3 of those creditors are owed less then $100 each. Pay those first, regardless of the interest rate. Save yourself time, worry, hassle. Stamps. Envelopes. Pen Ink. Whatever.


OK. A savings snowball.

Do you have a list of the things you want to buy, things you want to do, "when you have the money saved?"

I want a digital camera and I want new shoes. I want to SCUBA dive at the Great Barrier Reef and I want to see the Corn Palace. I would love a Kitchen Aid Stand Mixer and someday I will need a new car. One day I want to retire, and have a home somewhere they never see single-digit temperatures!

They are all on my list, and they will all cost different amounts and take me different amounts of time to save up for them. Also, just like my debts, there is a certain level of priority assigned to these things. I needed new shoes, for example, when the cold weather hit, whereas I want a digital camera, but didn't need one. A new car is, luckily, still a few years out, but when it's time, I will NEED a vehicle.

So, I've started a savings snowball. A little bit of money goes each month to lots of things on my list, but one thing I am focused on. "I can't go out to eat this week, because I want to buy new shoes."

Larger savings, like the car, or the retirement, are funded consistently, automatically. Kind of like minimums on that $20,000 credit card I once buried at the bottom of my list. But when I get there....when I have traveled and taken pictures with my digital camera to share with my friends, and when I have a Kitchen Aid Stand Mixer proudly taking up half my counter space (and never being used because it is too much effort to clean it), then I can look at my retirement fund and see how far I got without ever noticing.

Which seems like a pretty good deal, to me.