I was reading an article the other day that talked about financial snowballs. If you know anything about Dave Ramsey’s Total Money Makeover system, you know that his key to paying off debt quickly is to “snowball” your debt payments into other bills as the debts get paid off. So, for instance, let’s say your current debt load looks like this:
Debt #1 Minimum Payment Balance
credit card $25 $3000
credit card $50 $5000
car loan $250 $8,000
student loan $3000 $30,000
mortgage $1500 $200,000
The goal with Dave Ramsey’s snowball method would be that once you had the first credit card paid off, you’d put the $25 minimum payment onto your next credit card, making the minimum payment $75, and you’d continue snowballing the payments until all of your debts are paid off. The extra payments would help that happen faster.
Similarly, financial snowballs use that power of increasing cash flow to help you achieve individual financial goals, and ultimately, financial independence. Here are some examples of financial snowballs that can help your money get on more solid ground.
You might use one of these snowballs or a combination of them to help get your money situation more secure. The great thing about the variety of financial snowballs available is that you can mix and match them to fit your individual goals and needs at any time. It’s the process of time and continued deposits into the individual snowballs that makes them work, whether you’re putting $10 a month into each one or a $1,000 of work into each one. Obviously, the more money you can contribute the better, but don’t let that stop you from putting something into savings, because it all adds up.
Retirement accounts can often help you double your money faster as many retirement vehicles have a match value in place. So, if your employer offers you a match on retirement contributions of up to three percent, and you’re contributing three percent monthly, you’ve effectively doubled your money immediately, even without growth earnings that come with market increases.
Also, because of the tax deductibility of many retirement vehicles, you’re lowering your taxable income which means you’ll pay less in taxes, giving you more money to snowball into other places.
Don’t forget the Roth IRA either: just because it may not offer you an employer match or tax deduction, it’s still a great financial snowball because you’ll reap the financial benefits once you start withdrawing money as you won’t have to pay taxes on those withdrawal.
529 or other College Savings Accounts
529 contributions aren’t tax deductible, but the earnings do grow tax free. This is a great way to make a financial snowball for those planning on paying their child’s college expenses. And, bonus: there’ll be less interest to pay on student loans that won’t need to be taken out because of the money saved to pay college costs.
For years we refused to have an emergency fund because money was so tight. Then one day we decided to start putting away 1% of our income into a savings account. We figured we probably easily wasted one percent of our money – even on our super tight budget – so we started saving it instead. Then, when that became a comfortable savings amount we upped our emergency fund contributions to 2% of our income.
By snowballing our emergency fund savings, we were able to gradually get used to living on less, and today we have thousands of dollars in the bank to cover any type of financial unexpected. I’m a firm believer in contributing to an emergency fund no matter how tight your budget is. Start with a dollar out of every paycheck if you need to. Or look through your expenses and see how much money you’re wasting each month, and determine to put half of that amount into savings automatically after you get paid.
Over time, you’ll have more money set aside for an emergency than you ever dreamed you would.
Non-Retirement Investment Accounts
Non-retirement snowballs are almost as important as retirement snowballs. Everyone has different goals for using non-retirement investments. Maybe you want to pay cash for your house or pay it off super early. Maybe you want to fund a yearlong sabbatical from work. Maybe you have big travel plans. Or maybe you want to retire early. Whatever your goals, a non-retirement snowball will help increase your chances of reaching them.
People don’t often think of paying off debt as increasing financial worth, but it does. A net worth balance sheet has two side: assets and liabilities. When your asset side goes up, your net worth goes up. When your liability side goes down, your net worth also goes up. So, if you’re paying $800 on principal to your mortgage each month, you’re increasing your net worth by $800 each month, provided the value of your house remains stable.
Health Savings Accounts
This often overlooked financial gem has two blessings: first, it lowers your taxable income as HSA contributions are tax deductible. Some people use HSA contributions toward post-retirement health expenses, and that’s a great financial idea. However, there are many pre-retirement health expenses that people don’t normally think of as tax deductible that can be paid from an HSA.
In our case, we took a few thousand dollars off of our taxable income this year because we paid for our daughter’s braces and some dermatology expenses for me out of our HSA. This will lower our tax base and lower the amount we pay to Uncle Sam at the end of the years. That means a higher tax refund for us to snowball into other more profitable investments.
The More, the Better
The more financial snowballs you have rolling downhill in an attempt to increase your financial stability, the faster you’ll reach your financial goals. Again, the amount you put into each is important, but the habit of adding to them regularly is more important. Consistently through automation is the key.
What financial snowballs are you rolling in order to improve your money situation?