Most readers are probably familiar with the “debt snowball” method of paying off debt. Financial guru Dave Ramsey is an advocate of the system and you probably seen it at some point if you’re trying to pay off debts. Here is a quick recap.
- List all your debt starting with smallest to largest.
- Make the minimum payment on all the debt.
- Make as much extra payment as you can on the smallest debt.
- Once the smallest debt is paid off, then go to the next one.
As you pay off the smaller debts, you will have more money available because you will have fewer debtors to pay. In theory, as you reach the larger debt, the extra money available will grow; hence, the name because it is similar to a snowball gathering up snow as it rolls downhill. This isn’t the smartest method to pay off debt, but it works for many people because of the psychology behind it. You feel good when you eliminate one bill and it keeps you going.
So what do you do, once you’ve paid off all your consumer debt? Obviously, you don’t want to spend all that extra money on consumer goods. That will just start another cycle of spending and borrowing. Wouldn’t it great to have a payment coming into your account instead of the other way around?
That’s where we are right now. We don’t have any consumer debt. We contribute the maximum amount to our 401k and Roth IRA every year. We could spend the rest on eating out and clothes, but we choose to invest in our dividend portfolio instead. Would the snowball method work in the same way when building income? Let’s see we can adapt the debt snowball method to build our dividend snowball.
- List all your regular bills starting with smallest to largest
- See how much dividend you get per month on average or start building a dividend portfolio if you don’t have one.
- Cross off the bills your dividend is paying off
- Keep adding new money and reinvest dividend income
Building your dividend snowball will be a slow process, but it should eventually be able to pay all your regular bills. Let’s see how we did last month for example.
Dividend income: average monthly in 2015 = $840
- Life insurance: $24
- Pet: $25
- Gym: $25
- Electricity: $60
- Transportation: $75
- Eating out: $100
- Home, auto, and umbrella insurance: $148
- Groceries: $400
- Cash allowance: $400
- Preschool: $450
- Housing: $2,230
Hey, we are doing pretty well. Our dividend is already paying for all the smaller bills. The next item on the list is the grocery category and that’s a pretty big bill. Actually, we’re only $17 short from crossing that off the list. (I’m ignoring tax in this post…)
The good thing about our dividend snowball is that it should keep growing every year because it is specifically set up to do that. How?
- Reinvested dividend– I reinvest our dividend income.
- Dividend growth– I invest in companies that have a good track record of increasing their dividend.
- New investment– We don’t have as much extra money as we used to when I was working fulltime, but occasionally, we’d be able to invest.
So what do you think about the dividend snowball method? I’ve been looking at it at a higher level because I reinvest the dividend, but it’s encouraging to cross the bills off the list.
If you’re just starting your dividend portfolio, I highly recommend Jason’s blog – Dividend Mantra. His main focus is dividend investing and his articles are very easy to read. See his portfolio here.
Image credit: by kamshots
Passive income is the key to early retirement. This year, Joe is increasing his investment in real estate with CrowdStreet. He can invest in projects across the U.S. and diversify his real estate portfolio. There are many interesting projects available so sign up and check them out.
Joe also highly recommends Personal Capital for DIY investors. He logs on to Personal Capital almost daily to check his cash flow and net worth. They have many useful tools that will help DIY investors analyze their portfolio and plan for retirement.