Thursday, March 5, 2009

Prioritize Your Savings from Get Rich Slowly

Ask the Readers: How to Prioritize Savings Goals?

Once you’ve paid off your debt, it’s time to save. But for many of us, it’s difficult to know where to start. Via Twitter (and edited slightly), @funkyknitwit asks:
How do you set priorities with savings? I have so many things I want to save for, but I don’t know where to start! What I mean is, how can I decide which thing I should work towards first? My budgeting is already in order.

This is a tough one for me. I find it difficult to decide which things to save for and when. I use multiple accounts at ING Direct, but there’s no real rhyme or reason as to how I fund them. For example, here’s a glimpse at my saving progress from last summer: (see above picture)

Since July, I’ve added two additional accounts for other goals. How do I choose which accounts to fund with my savings and how much to put in them? It’s all pretty much instinct, I’m afraid. Maybe I should have a plan.

Other folks are more methodical than I am. Several personal finance blogs — including No Debt Plan, Poorer Than You, and Blunt Money — advocate a “savings snowball”, which is based on the popular debt snowball method. When using this system, you don’t have to choose just one thing to save for at a time.
Note from Lena: I use the debt snowball method, and have for years. It works.
Here’s how it works:

Make a list. Write down all of the things — large and small — that you’d like to save for. You might include a trip to Mexico, a new car, your summer wardrobe — and even your Roth IRA.
Prioritize. After drafting your wishlist, choose just a few items to save for first. Organize them from most important to least important. (By “most important” I mean the item you’d like to see completed first.) I think this step is key to answering funkyknitwit’s question.

Pay the minimum. For each item in your savings list, assign a minimum monthly payment.

When working a debt snowball, these minimums are assigned by your bank. Here, however, you set the minimums. For each item in your savings snowball, save the minimum every month.
Snowball! For the “most important” item on your list, pay more than the minimum each month. For this item, save as much as possible. When you’ve completed saving for it, move on to save as much as possible for the next item.

There are a couple of ways to replenish the list. You might opt to add a new item at the bottom every time you finish saving for the top item. Or you might finish saving for every item in the list before making a new list of savings goals.

Note: Some GRS readers have told me that SmartyPig is an excellent way to save for specific goals. SmartyPig accounts currently offer 3.25% APY, which is a great rate. Read more here.

How do you prioritize your savings? Do you save for only one thing at a time? Do you use some sort of “savings snowball”? Or do you simply set aside one large savings account from which to make all of your purchases? and how do you choose what to save for first?

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