The investment waterfall – a term we believe we’ve coined for this particular use – is an important concept in financial planning. It basically describes using cash flow for a certain purpose, then rolling it into something else when you have completed the goal. A common place this is used is in debt repayment. Mathematically, the fastest way to pay off debt is by paying off the debt with the highest interest rate first, making only the minimum payments on the other debt. When you finish paying off Debt A, you roll all of the cash flow you were using to pay it down into Debt B. This is referred to as the Debt Snowball or Debt Avalanche.
The same thing happens when you are saving for multiple goals at the same time. In the example above, if you calculate them separately, you would need to save $341 / month for a house, $712 / month for college, and $621 / month for retirement, which totals to $1,675. However, in reality, after 5 years, you would roll forward the $341 / month into college savings, and when that was done, you would roll $341 +$712 into Retirement Savings, thereby reducing the total you’d need to save in a given month to $1,372. This is a fairly difficult optimization problem to solve, one that gets more difficult with more savings goals, but something that the WeVest Platform does fairly easily, and predicts when you will reach each of your targets and then rolls the money into new goals to accurately predict the future value of your various accounts.