I read a great article from Retire By 40 across my reader today. I think you’ll love it as much as I did. I wanted to do a little more than just share it over Twitter where it can slip away.
Joe Udo writes about building his dividend snowball. It starts with an explanation of Dave Ramsey’s debt snowball which coaches people to eliminate their debts by starting small and building momentum.
As Udo points out, the same theory applies in the other direction.
If you want to create a passive income, you have to start somewhere. So start investing in dividend producing stocks. Keep saving money and putting money into them so that the dividends grow to replace your bills. Start with small bills. For example, I’d probably start with my Amazon Prime bill. The annual $99 price comes out to be $8.25 a month. If you had $3,300 in a dividend stock that pays 3% a year, you’d have free Amazon Prime.
It might not sound like a great idea to put $3,300 aside for Amazon Prime, but if you think of it as something that is more critical, such as electric bill, it seems a little better. It also also worth noting that stocks tend to appreciate, so even if you start with $1000 now, it will likely grow over time to pass that $3,300 number. That’s the power of the compound interest and a dividend snow ball.
I’ve been saying a similar thing for years, but I think Udo articulated the process here better than I have.
I’m a big fan of cash flow creating financial freedom rather than the typical case of building a huge nest egg and drawing it down in retirement. It’s hard to focus on having $2 million in retirement accounts. It’s easier to say, “Hey, my cash flow covers my utilities now… COOL!”
Dividends aren’t the only way to create this cash flow goal. As I write in my annual “What Does an Annual $200,000 in Retirement Income Look Like?” article, I’m taking a number of paths. In fact, I haven’t thought much about dividends. As far as stock market equities go, I’ve been focused on investing in big index funds.
However, we also have rental properties. They are bit of a headache now, but over time, they could provide some very good passive income (we may have to hire a property manager to make that work).
There’s also Lending Club, which seems to yield more than 7% in my years of investing with them. That’s much better than most companies’ dividends. That also means it reinvests and grows a lot faster too.
Finally, I’m starting to get into the dog sitting business with DogVacay.com. While it isn’t exactly passive income, I’m walking our own dog anyway. I’m picking up my dog’s poop in the backyard. It isn’t too much work to have a second visiting dog. In fact, it might be less work as it gives my dog entertainment. This is just something getting off the ground in the next month, so I’ll report more about it after some practice. My hope is that it brings in a few hundred dollars per month. That pays a lot of utility bills… maybe even a car payment.
If we can save it and invest it, we’ll just be growing that dividend snowfall that much faster.
I never wrote about this but this is pretty much how I’ve been looking at all our income-earning activities outside of our jobs. My goal is to figure out how much of our job-income can be replaced by dividends but I also need to spend some time researching the most tax efficient way to do this as well.