How an escalating savings plan works?

An escalating savings plan is an excellent strategy to use when working towards a financial goal in the near-to-mid future. It is the process of slowing increasing an automated transfer to a savings account after each payment, so as to help the saver both psychologically adjust to the discipline of saving and to also help the saver to make sure that they don’t stagnate on their way towards increasingly sophisticated goals in the future.

To put together an escalating savings plan, we can start by looking at the final amount of money that we need to save for, in order to meet our financial objective. We then start to make some manual adjustments to build an escalation plan that best suits our financial capacity. The simplest way to build up the escalation plan is to start with the even payments over the course of the entire savings term.

From there, we take a proportioned amount off of a given earlier payment and then add it back into a later payment. For example, if we take 25% off of each of our earlier payments, and then add 25% into our later payments, we will wind up with the same amount of principle (ignoring compounding interest) at the end date, and have tiered our savings plan over two main periods. We can take this a step further by tapering it across quarters, or any period that we should see as being fit.

For those of us that are a bit more mathematically sophisticated, we can build a specific model that will allow us to plan for exactly what kind of payments we would need to make on an escalating basis to meet our financial objective. This is accomplished by using a percentage increase amount to each of our escalating payments until we come up with our desired ending amount. The simplest way to accomplish this is to set up a spreadsheet that will tally up the sum of the contributions that we make to the savings account, and then we can use trial and error to adjust the rate at which the payments increase until we find the final amount that we are looking for.

For example, starting with a $100 contribution to a savings account, which increases by 15% per month, for one year, will leave me with $2,900 at the end of the year (ignoring compounding interest). This is $1,700 more than if I had simply done a $100/month contribution to my savings account, and is well within my means to make.

Also read: How a declining saving plan works?