I think most behavioural scientists, or anyone with an interest in personal finance, knows what avalanching and snowballing debt is. For those who don’t:
Avalanching: repaying the most expensive credit card (outstanding debt) first, the expense tends to be measured in terms of APR;
Snowballing: repaying the credit card (outstanding debt) with the smallest balance, so you can reach the achievement of having one less debt quickest!
These terms came into existence to explain different debt repayment strategies, when faced with multiple debts that require repayments. These strategies do assume that you have to take of your minimum repayments first, and then move onto further resource division, tackling your debts at whatever pace is feasible for you. But they essentially address what you should be doing, financially or psychologically, when being faced with conflicting goals.
Now I’m wondering, what would that look like for savings?
You might be asking yourself: does that even apply to savings? Well in essence, if you And I don’t know about you, but I always find myself juggling multiple savings goals. For transparency, my savings goals are as follows:
Emergency fund (almost to 6 months of expenses!)
Holiday in New Zealand with the fam (scheduled for March)
Tattoo fund (aiming to get a full back piece in January!)
Investing fund (future goal – currently at $0)
So there you have it, I’m (sort of) juggling 4 savings goals at the same time, although realistically I’m juggling the first 3, and once I hit the goal for my emergency fund I’ll start another savings account for my investment fund and move the flow that initially went into the emergency fund will now move there.
So when juggling 3 different savings goals, what’s financially the smartest thing to do here? Or in cohesive terms: what’s the best way to avalanche these savings?
Well, this is where the analogy stops working. Whereas you avalanche debt to get rid of costs, that’s not really how savings work, because unless you’re maximizing interest paid on the savings balance, there’s not much to cut down on, or maximize for. With savings, it seems like you’re always juggling different kinds of urgency. And that is a dangerous game.
Why is that a dangerous game? Because although not having an emergency fund is in fact an emergency, it’s not something that will have as definitive a deadline as the holiday scheduled for March. So in terms of urgency, emergency always loses out. Especially when temptation (my tattoo fund) has something to say as well.
What can you do? Hold yourself accountable. Set trackers, goals (I use GoalSavers) against your savings progress. Create artificial deadlines essentially. For each of your goals, have it in your app, or in an Excel sheet, what you need to put in, at the minimum, to reach your goal at a certain stage. Again for transparency, my first 3 goals all need to be cleared by end of this year. And my app literally tells me how much I need to put into the savings accounts every week (I get paid fortnightly so I just double the amount). As soon as my wage comes in, it gets moved into these savers. Then I pay money into a bills account which is shared with my husband, and whatever is left is for me to spend as I see fit. It’s a structure that gives me a lot of peace of mind.
What if things go bust? It's entirely possible that despite your best efforts, something isn’t working. For a variety reasons you may struggle to contribute the amount of savings you had in mind. Ways of avoiding that would be:
Make sure to track your past inflows and outflows correctly and know what amount of money you can realistically set aside. Ambition is good, foolhardiness is not. Severe restriction is not feasible for longer periods of time, especially not if it doesn’t leave any room for unexpected expenditures – and they always pop up.
Make sure you only budget based on inflows you’re sure of. This is especially important if you’re self-employed, do gig work or have other streams of highly variable income. If you’re not too sure whether the money is going to come in, do not base your minimum contributions and therefore your schedule on it. If the money does come in, excellent, you can now contribute to your goals additionally.
Okay so the two above statements should help prevent the savings strategy backfiring on your. But that’s preventative at best, which isn’t helpful if you’re already in dire straits. Let’s just assume things have gone bust and go from there:
·For the short-term, rejig the whole lot. Don’t get trapped into the ‘mental accounting’ of it all. Even if in your mobile banking app you’ve got everything nicely separated, your accounts and pots of money are nicely labelled, money is and will always be fungible. It’s 3 clicks to empty out one pot and make sure the other is full, or at least progressing. As long as it doesn’t become a habit, especially not one that’s somehow always effecting the emergency fund (negatively). For example, if I realise by the end of this year (so December 2023) that I cannot get the money together for this family holiday which is a non-negotiable in my book, my tattoo fund has to bite the bullet. I have a very clear hierarchy to my savings goals, despite contributing to them simultaneously.
For the longer-term, redo your savings strategy by figuring out what made it go bust in the first place. Did you have too many unexpected expenditures? Could you, realistically, have expected them? Where was your emergency fund in all this? Can you actually save the amount you said you would? Is there more you can cut from your spending? Did you expect to earn more than you did? Do you need to rejig your savings hierarchy? There’s plenty of questions to ask, but you’re the only one with the answers. A lot of finance is just a lot of introspection at the end of the day!
So is this really avalanching or snowballing for savings? I guess for savings it may look a bit more like cascading, with, at least in my case, there being a hierarchy as to what the first goal to be met is, followed by the second, although only ever contributing a pre-determined ‘minimum’ (based on your income and the deadline of the goal) before moving onto the next one. I’ve tried my best to draw it out in the picture below, but let’s be honest, I’m not exactly an artiste.
There’s two very important things to note here:
There is a minimum that needs to be contributed to each savings goals, as determined by the hierarchy and the deadlines set – this is calculated over your real wage, to the best of your budgeting capabilities;
Any additional money that comes in (bonus, windfall, capital gains, tax return, overtime, you name it) follows the same hierarchy, but is a bit more flexible. If you hadn’t filled up your buckets and you have additional money, you just follow the hierarchy until it’s satisfied If you’ve filled up your ‘buckets’ and you have an additional $500 to save it depends on what you want to do. I still follow my hierarchy, but if you’d prefer to ‘snowball’ this into the bucket with the highest urgency for some peace of mind, no psychologist is going to fault you for it!
I’m curious to hear from others in both personal finance and behavioural science what they think of this strategy, and what they might recommend doing instead!
