When you’re paying off debt, you often hear of two methods: debt snowballs and debt avalanches. They both get you where you’re trying to go in the end, but psychologically, they’re very different.
Debt snowballs are where you list your debts in order of the amount owed. You pay them off from smallest to largest, adding the amount you were previously paying to the next debt when the smaller one is paid off. By the end of the debt snowball, you can make pretty big payments, since all your smaller debts are now gone.
You regularly get the feeling of some wins at the beginning as you pay off your lower debts.
Debt avalanches are where you list your debts from highest interest to lowest interest. You pay them off starting with the highest interest loan first. This method actually saves you the most money overall, but may not have the same psychological effect, since it can be a while before you manage to get the debts paid off.
I’m finding the same is kind of true with savings.
You’ve got your savings snowballs, where you list your savings goals in order from smallest to largest and then throw money at each one until you achieve the goal.
You’ve got your savings avalanche where you set your savings goals and the date you want to achieve them by and then put in a monthly amount towards each goal.
Personally, I’ve found that I’m usually a savings avalanche when I have a steady job and know I can count on a regular amount each month.
When my life is more freelance based, I become more of a savings snowballer.
This year though, all of my finances keep taking hits and it suddenly occurred to me – there’s no reason I have to stick with the savings system I set up if a different one will work better for me.
I know I struggle more as a savings avalancher, because I’m way more motivated to hustle harder and keep saving when I see my goals getting crossed off. When I’m avalanching, I don’t feel the same urgency to turn over as much of my hustle money towards savings goals.
So at the beginning of the month, I switched over to savings snowballing and actually feel considerably less overwhelmed by my financial goals than I have all year.
That being said, I actually arranged my snowball in order of priorities, not the actual savings amount.
My financial goals for 2017 are (in snowball order):
- Max Out Roth IRA
- Save $2,000 Towards a New Car
- Buy $1,000 in Stock
- Save at least $600, preferably the full $1,200, for 2018-2019 Car Insurance Payment
- Save $5,000 for House Down Payment
- Add $1,200 to Emergency Savings
Now, the nice thing is that I have been working towards some of them at least a little bit this year, so some of the work is already done.
I can say, that at least for me, since switching to prioritizing one instead of adding a little to all, I haven’t hesitated to toss every extra bit of income at the IRA. I’m really excited about possibly crossing that off in the next month or two.
And it’s nice to be excited about something instead of feeling totally overwhelmed!