The Champagne Fountain Money Saving Technique Part I

While many find it easy to save money, far fewer are able to allocate their savings properly. They want to save for emergencies, vacations, a future home and more. But when it’s all in one big pot, how do you account...

While many find it easy to save money, far fewer are able to allocate their savings properly.

They want to save for emergencies, vacations, a future home and more. But when it’s all in one big pot, how do you account for every dollar?

In my years as a financial planner, I’ve recommended one method for all my clients: the champagne fountain savings technique.

Imagine your money is a champagne fountain, and the first rung of the fountain is your emergency fund. The fountain starts to flow, slowly filling up the first rung. Once that bowl is full, the money continues to drip down into your next highest priority. For some this may be a new car, a down payment on a house or preparation for a new baby.

After each rung has been filled, the money continues to flow down. A vacation fund may be the third rung. Maybe it’s a college fund for your niece or a travel fund for your sister’s destination wedding.

This technique is important because most of us have multiple things we want to save for, but doing so can be confusing and complicated. How do you decide what to save for first? This technique allows you to allocate money based on personal priorities, whatever those may be.

If you want to implement this method, here are a few things to do before you get started.

Figure Out Your Priorities

The first thing you need to do is to figure out what kind of goals you have. Everyone needs an emergency fund, but do you need three month’s worth of expenses? Is a year’s worth more appropriate for your situation?

What other items do you need to save for? If your car is on its last legs, a car fund may be a good idea. If you’re in the market for a house – or hope to be in the next few years – starting a down payment is a good way to see how much you can afford.

Whether you’re thinking about getting married, starting a family or taking three months off to backpack around Asia, setting up a designated fund is the best way to make sure you can financially support your goals.

Rank Your Goals

Once you’ve realized what you truly want to do, the next step is to rank those goals by importance. Some of these can be determined by how much you want something (i.e. if you want a new car more than a vacation abroad), but others are more practical.

Before you fund your trip to Bali, set up an emergency fund. Even if you’ve never had a trip to the ER or a bad car accident, you need to be prepared for the worst case scenario. Having a credit card is not the same thing as a pile of cash sitting in the bank. If your emergency causes you to miss work or lose your job, getting into debt will only make your situation worse.

One way to determine which fund should be next on the list is to figure out when you want to accomplish your goals and how long it will take to save for them. For example, if you want a new car and a new house, figure out when you’re hoping to make those purchases. Can your car run a little bit longer if you need it to? Is your current housing situation desirable enough to stay put while you save for other priorities?

Why You Need to Implement This

If you’ve been saving your entire life without using this method, it’s easy to ignore why it can be useful. Many of my clients struggle to know if they can afford something. Sometimes they’ll buy a new house and not realize they didn’t have an emergency fund until their water heater breaks.

Some people quit their jobs without having a back-up plan.

Using this method makes it clear what you can afford – and what you can’t. If your friends want to fly to Vegas but your vacation fund is empty, you know it’s not in the cards. But if your best friend plans a wedding in Mexico for the next year, you’ll know just how realistic that is, and how much you need to make it happen.

Putting effective systems in place can ensure that your financial life rolls along smoothly. You can even set up your checking account to deposit money automatically every month. Then, when you need to buy a house or a flight to Cancun, you’ll be ready.

I’ve seen this technique work wonders for my clients. Once you become more aware of what you can accomplish with your money, your life will improve. By having a system in place for your savings goals, you dramatically increase the odds that you’ll accomplish them.