Do you want to learn what the passive income snowball is? It can single handedly take you rags to riches with time.
Now this is a topic, which I am obsessed with – I feel I could write an entire book on the passive income snowball! This is a very interesting topic and I feel it has been briefly talked about but never in as much detail as what I am going to go into here.
So what is the passive income snowball – this may be a concept that people don’t understand. The whole idea of a passive income snowball can be illustrated by the following example. Imagine standing at the very top of a mountain in the middle of winter. At your feet is thick snow and the entire mountain is covered in snow. You bend down and with your bare hands scope up a handful of snow and work it between your two hands using the warmth of your hands to massage it into a perfect snow ball. Now imagine the mountain you are standing on is Mount Everest at 8,848m in elevation. You decide to drop the snowball from your hands and let it roll down the mountain. At first it has a really small surface area, and will pick up very small pieces of snow every now and then, it starts off with a 5cm radius and over the first 1,000 meters it rolls down the mountain it increases to 7cm in radius. The increase in size is pretty small. Over the next 1,000m it starts to gain a little speed and picks up more snow than it did in the first 1,000m growing to 10cm in radius. Now it is double the size that you started with and its only 20% of the way down the mountain. The next 1,000m it grows out to 15cm in radius that is now 200% bigger than what you started. The following growth occurs over the remainder of the mountain. 3,000 – 4,000m 25cm, 4,000 – 5,000m 35cm, 5,000 – 6,000m 50cm, 6,000 – 7,000m 80cm, 7,000 – 8,000m 110cm. There is this exponential growth that goes on and despite a slow start the ball ends up being 2,100% bigger than with it started as.
So that is the analogy we are going with here and that in theory is the snowball effect. Now when we translate that into financial terms the same result occurs. We start off with a relatively small investment combined with multiple years of growth and you end up with a much larger balance. This effect is the compound effect but a passive income snowball sounds way cooler.
Now there are some pretty obvious problems with a passive income snowball – the main one is that it takes a very very very long time to start kicking into action and you seeing the results. In MJ DeMarco’s The Millionaire Fastlane, MJ says that generally people are told to save away 10% of the income, let the compounding effect take hold and by the time you are 65-70 you are millionaire with 10 years left of your life to burn your millions. You can go buy a Ferrari but your pacemaker cant handle the g forces when you drop it into second gear at 6,000rpm. Where is the fun? And I completely agree with him. Who wants to get rich only to die 10 years later having lived frugal your entire life. Click here to follow my review of MJ De Marco’s book where I go into his arguments into a bit more detail.
The other side to this argument is that this does get you’re the results you want, so why complain, be patient and trust the process. There are things that you can do to kick start this process a lot more. The quicker you get to $100,000 in investments the quicker you start to see the results. A bit like the quarter mile drag racing, the 60 foot time is important as it is a gauge of your pace and indicates the overall trajectory of your run very early. The quicker the 60-foot time the quicker the end result. So what I am trying to say here is that having a $100,000 investment is your 60-foot time. You want to do everything possible to make sure that your 60-foot time is quick. MJ only talks about investing 10% of your salary into the investment however for those people out there serious at optimizing their wealth they can pump in more than 10% of their salary – up to 80% of their salary is possible if you are a complete tight arse. This type of saving will mean you get the end result much faster, and could mean you reach the million dollar mark much earlier in life and you can still buy that Ferrari when you have your real teeth.
When I think of my passive income snowball I have this drawn out in my mind, and for me the key is to try and generate as many different passive income sources as possible and get all of them working together to develop that snowball. Say for example I invest in some shares, the dividends I obtain will either be directly reinvested through a DRIP or DRP scheme and will grow automatically over the years, then say I have a term deposit in my name that pays out interest every month, that interest I can put into a special snowball account which I can use for investing into the share market or alternatively leave it in the term deposit account and let that keep growing. Then I develop some passive income through my Red Bubble sales and any profits that are earnt through there are added into my investment account that I continue to invest in shares. I constantly add to this account through “paying myself first” The Richest Man in Babylon and then I continue to invest these proceeds. Paying yourself first is one of my key takeaway which I put into my list of things I’ve learnt from reading these books. If you want to read the complete list then click here. Then I opt into drop shipping and set up a store and it starts making sales, I pull the proceeds from that in invest. All this time I constantly am getting paid dividends and repurchase shares with that money. As the years pass and this process is put on autopilot the snowball continues to grow in size.
Then when I reach that $100,000 investment size things really start to kick in and gravity hits. Like a rampaging bull through the Spanish streets my investments work around the clock for me. Its that easy… Well is it really?
Here are the hardest parts:
1. Where do you begin?
2. What happens if the share market drops
3. I’m not patient.
4. I really don’t have the money to invest right now
Well I’m going to disperse the naysayers here and explain to you how to get over the hardest parts. Firstly it does not matter where the hell you being it just has to be somewhere. Have a read through all my passive income ideas; pick one that you think you would enjoy and be able to get into and the start. It doesn’t have to be challenging at all – the easiest one is to start up a term deposit. Hardly anything here is required, $500 bucks and 5 minutes on a computer will start of the snowball very slowly. The important thing here is that you do make a start and the sooner you make a start the better. Once you make a start and see how easy it is and visualize the end result (You need desire – see think and grow rich) then it’s going to happen. Once you have the ball rolling you will then see the next opportunity and the one after that and then after that. “It doesn’t matter where you start, it matters where you end up.” — President Obama.
If the share market drops, and it sure will then it doesn’t matter there is opportunity for you to invest when the prices are lower and Warren Buffet once said to someone to be “Fearful when others are greedy and greedy when others are fearful”. If the market is down take advantage of it. The market fluctuates a lot. And the snowball isn’t something that just happens over night, it takes a long time. In this time you will see many cycles in the share market – bear markets and bull markets. These are bound to happen, take note of where the market is and base your investment decision on that. IF you cant find any good shares on the market due to unfavorable conditions then hold off on the market and invest your money elsewhere. There are plenty of opportunities that you can take up.
If you are not patient then you have to learn how to be. The results can be incredible, having no patience will get you nowhere in life. Enjoy the process of developing your snowball. Gary Vee always says his end goal is to own the New York Jets however he says that he enjoys the process of earning enough money so he can afford to buy them way more than he will enjoy actually owning them. He loves the process and says that is what you need to learn to love. Its hustle, it’s fun, it will work, just enjoy it.
There is never any good time to start something, and you don’t even need money to start. If you have no money then you need to get your hands really dirty and starting spending all your time on things. For instance something like red bubble does not require money to start, it just requires time. Money is not important here.
So when you hit the $100,000 mark this is the way it plays out in my mind. Say you have 5% returns on your shares and this would generate $5,000 per annum. Lets round that up to say $120,000 invested generating $6,000 per annum or $500 per month in returns. This cash is coming into your account and then you also have your other passive income streams that you have developed over the last few years. So with that $500 and say you generate an other $200-$300 per month from other streams of passive income – you then bundle all of them up and invest the $800 into the share market each and every month. Each month comes around and you get to think about where you are going to invest it. That would be the best bit, being able to do your own research and strategic figure out your investment schedule with your proceeds. You control your destiny and it is in your own hands, not in the hands of an employer who can kick you out of your job with 4 weeks notice and really screw up your passive income for a long time.
Until you get fired or leave your job and you have zero income you won’t notice that things can really change instantly and that income which you are so dependent on just disappears. Just keep that in mind. If you are looking out for yourself in the future then you need to financial ensure you can survive without a job for a short period of time. Some people just never experience this until its too late.
If the market takes a hit you don’t mind, you have started this entire process yourself and you can see that you started with nothing and look what you created. You can do it again and again and again. Its easy once you figure out the blue prints and just get it done.
Now I am pro snowball and being patient, however I really do think it is important to read the other side being what I already mentioned in MJ DeMArco The Millionaire Fastlane. This process takes time and could result in your being wealthy very late in your life. So please keep that in mind!
Want to read more?
If you are like me and want to read all there is one generation of passive income, then follow this link through to my Top 30 Passive Income Ideas. Here I list out similar ideas to the one above, and go into detail explaining how to generate passive income through them.
I also have my Top 10 Passive Income Book list that I save you hours and hours of reading and take the very best lessons I learnt from each book.