Remember when I pledged to invest 100 percent of my 2012 income? Here’s my January update…
As you’ll recall, my pledge was to max out my Roth IRA, and split the rest between buying rental properties and growing my website ventures.
My report? Ninety percent of my January income went into my Roth IRA. Ten percent went to business-related expenses that I couldn’t postpone, such as renewing the hosting package that allows you to read this website.
Wow. That was the simplest expense report ever.
Which leads me to an observation: Saving money is easier when you “snowball” it.
The “snowball method” is a phrase popularized by finance guru Dave Ramsey, in reference to paying off debt. Dave Ramsey argues that you should throw all your spare cash at your smallest debt, regardless of its interest rate. You’ll feel a psychological victory when you cross that debt off your list, he says. That victory will motivate you to cross another debt off your list, followed by another one.
His method is controversial. Some people love it, others don’t.
I don’t have any personal experience to tell you whether or not it works for repaying debt. But in my experience, the snowball method is a great savings motivator.
Take the Roth IRA, for example. Eligible participants under age 50 can contribute $5,000 per year, which translates to $416 per month.
But $416 per month is just so darn unfulfilling. Each month, you take a big chunk out of your budget – but by April, you still have less than $2,000 saved.
Yawn. Pardon me, but that bores me a little.
Throwing every spare penny into the Roth IRA is a bigger motivator. In a few weeks, I’ll be able to cross it off my list completely. Then I’ll move on to the next goal.
(Side note: It’s a good idea to invest in the stock market slowly, instead of investing a big chunk of money at once. So I keep my Roth IRA in cash, and “pace myself” with a monthly stock fund purchase.)
Should We Snowball All Our Savings?
I’ve been toying with the idea of taking this approach with the way we save Will’s money, as well.
(Background info for new readers: Will and I are a couple who have pledged to spend 2012 living entirely on his income, while investing the entirety of mine. We expect to earn roughly the same amount of money this year, which means we’ll invest 50 percent of our total household income.)
The pledge is to INVEST all of my money, which means we have to SAVE Will’s income for:
- Car repairs
- Replacing his 15-year-old car and my 14-year-old car whenever they stop running
- Health care, since neither of us have employer-provided health insurance
- Travel, since we’re both travel addicts
- Annual expenses like contact lenses and veterinary bills
Right now, we throw money into a general savings fund that we tap whenever an expense comes up. It’s worked so far. But it feels unsatisfying, since it’s hard to measure if we have “enough” saved.
So I’m toying with the idea of opening many savings accounts, each one directed towards a specific savings goal.
Normally, people contribute a small amount per month for each goal: $50 towards the car repair fund, $20 towards the contact lens fund, and so on.
But I think we’ll save money with the snowball method: Max out the contact lens fund. Then max out this year’s travel fund. Then tackle the monster goal: replacing our cars.
(Obviously, if my car goes kaput! before we’ve saved enough to replace it, I’ll redirect our travel money towards buying a replacement. The broader purpose is to enjoy many psychological “wins” of crossing goals off our list. Those “wins” should motivate us to save more.)
The Bottom Line
Throwing almost all my January income into my Roth IRA was easy. I didn’t need to do any fancy accounting or budgeting. I just paid a few business-related bills, and I poured everything else into the Roth.
Its simple, “lazy” investing — my favorite kind. 🙂
Thanks to Kamshots for today’s photo.
Learn How To Escape the 9-5
Get free updates on building wealth and living to the fullest.