You are probably familiar with the debt snowball repayment strategy advocated by financial guru Dave Ramsey. You make a list of all your debts from smallest to largest and then prioritize paying off the smallest loan first. This means making extra payments on the smallest debt while making minimal payments on the other loans.
The major benefit of the debt snowball method is that you can see progress, with the smallest debt disappearing first. For example, if your smallest debt is a few hundred dollars, you can probably close it out in a few months. This small win gives you a psychological boost and encourages you to continue with the debt snowball.
Once you’ve paid off your debts, it’s time to start on the passive income snowball. This is a similar strategy to build wealth that will help you reach retirement and financial independence.
Passive income generally requires minimal work to generate it. It could include interest from a savings account or CD, stock and bond dividends, rental income from property, and income from person-to-person lending investments.
To start a passive income snowball, make a list of all your recurrent bills from smallest to largest. Beginning with the smallest monthly charge, start paying those bills with passive income instead of earned income.
For example, one of my smaller bills is my prepaid cell phone bill. I spend about $40 every 3 months on prepaid minutes. I can invest in 100 shares of AT&T for the cost of about $3,100. Currently AT&T pays a $1.76 dividend per share. With 100 shares, I will receive $176 per year. This dividend payment covers my cell phone bill, and I don’t have to pay for it out of my salary.
You can see that this strategy starts off easy enough. But once you cover some of the smaller bills, this strategy gets more difficult to implement. A car payment, for instance, could be anywhere from $200 to $800 per month. It will take more time to cover that amount from passive income streams. But as your income increases, you will be able to invest more of your earned income and get more passive income from those investments.
The goal is to be able to pay all your bills with passive income. At that point, you will be financially independent and will not have to work a regular job anymore.
Joe Udo is planning an exit strategy from his corporate job by reducing expenses and increasing passive income. He blogs about his journey to early retirement at Retire by 40.