This post came to me whilst out for a walk in the snow a few days ago; the simple act of nature and fresh air gave me ample time to think about recent things. The solitude and calm about the place left me to think with no distractions. It also has made me more motivated and excited than ever about this path we have chosen.
The effect of a magic snowball.
The magic of a snowball, given the right time and place, can be amazing. The simple act of starting off small and letting it grow by itself means that the effects are endless. The analogy of the snowball is perfect to describe compound interest; you stand at the top of the hill and let your snowball go. It starts off small at first, but as it picks up speed and more snow, the faster it builds. The bigger the hill, the bigger the snowball at the end of it. This is exactly the same for compound interest.
The power of time.
As an example, if you save/invest £1,000 and get a 4% return, at the end of the year you’ll have £1,040. The next year, you’ll then earn that 4% on £1040, assuming you didn’t add anything else to your pot. At the end of the year, you’d then have £1,081.60 and so on. To begin with, the rises each year are small, but they add up over time. That’s the genius of compound interest, or the effect of a magic snowball!
My Snowball and the plans to build!
I’ve only recently started investing and although my numbers are small, I have in effect started to build my own, albeit very small, snowball. The reason why I continue to lean towards dividend investing, as this will help my snowball grow faster than I could do by myself. The snowball effect will begin to take effect through the following ways:
- I will reinvest any dividends I get; I can buy more shares and then the dividends will grow!
- Increased dividends; over time companies should raise their dividend payouts
- New money – money saved and invested through the year
All of these added together will continue to build my own snowball, so that one day it’ll propel itself along without much input from me. That’s the plan anyway; slow and steady wins the race. Once it’s rolling along by itself, I shall have even more time to spend doing anything I like; the freedom of financial independence lets you do that! I could do whatever I liked, and my snowball would continue to roll.
The rest of 2016.
I have calculated that even without adding any fresh capital to my S&S isa, I should get about £74 in dividend payments this year. That’s £74 I don’t have to save, as the companies I own shares in pay me just a little bit twice a year just for owning a bit of their company. Now, I realise that £74 in a year wouldn’t get me very far; it wouldn’t pay any bills on that amount. However, if I can continue the game and add in more each year, than dividends will continue to rise. I would love to aim to receive £100 in dividends in 2016, though I don’t know if I’m being a bit optimistic at this stage!
As an example of one I already own is Next (NXT). Based on last years dividend payments, excluding the special dividend ones, they should pay me £13.50 for owning just 9 shares in the company. This is also not counting any special dividends and dividend increases that there might be during the year. That’s then £13.50 I can reinvest without having to do anything!
Another one is BT (BT.A) in which I own 100 shares. Based on last years dividend payments, I should receive £12.40 this year. That, combined with the Next payments is £25.90 I can reinvest without doing anything. The snowball is very small in my corner, but it is starting and how exciting that is. Although it feels at time like I’m not doing well with this journey and so far from my target, I know that perseverance and sticking it out for the long term will pay off. Imagine having enough dividend payments to cover the cost of mortgage payments during the year? Or council tax? Or gas and electricity for our home? That means that the pressure begins to lessen.
What about you? How is your snowball doing?
Oops I think you have a typo in the Power of Time paragraph. 4% of £1040 is 41.60, but that would be additional to the £1040, so you would actually have £1080.61.
Oops, thanks for pointing that out!
Congrats on throwing your investments into the ring. Slow and steady really does win the race. I love the simple explanation of that!
I say it to myself often when I think I’m not doing enough 🙂
You gotta start somewhere! Congrats on getting the snowball rolling. Never become numb to the numbers as they start adding up. It’s hard to appreciate $500 a month coming in sometimes when you see everyone else doing the same thing in this community.
It’s fun to watch though!
You do, you have to start somewhere! And thanks; it’s so small at the moment but I’m looking forward to seeing it grow 🙂
Almost everything about the snowball method is good. But what I kinda hate about this method is that bigger debts eat up more money because they often have compounding interest charges. 🙁
I’ve been reading your blog with interest as I’d love to copy your idea of using a passive income to pay bills – your idea is fab!
However, I am a total newcomer to this and don’t understand how you can get a dividend income whilst still reinvesting the dividends? I would have thought you either take the income from the dividends, or choose to reinvest the income to buy new shares? Sorry, this is probably a very silly and basic question!
Not a silly question! So, I receive dividends as income, but I choose to keep that money within my ISA and I reinvest it myself – does that make sense? 🙂
Thank you Nicola! Yes, that makes sense 🙂 So you buy more shares using the dividends money. So I’m guessing once you get to retirement age, then you’ll start taking the dividends as cash to pay the bills?
Exactly 🙂