THE WEALTH SNOWBALL: YOUR GUIDE TO FINANCIAL FREEDOM

The secret to financial freedom isn’t as complicated as you think.

“Success is like a snowball. It takes momentum to build and the more you roll it in the right direction, the bigger it gets.” — Steve Ferrante

When a telecommunications company executive was asked if she considers herself successful, she said no, because she has not achieved financial freedom.

A lot of people can relate to her because financial freedom seems to be an elusive goal. It is not because they are not earning enough, but because they go about it the wrong way. They strive to earn more money to have more cash on hand instead of managing their money wisely. What they need is a personal finance strategy, such as the wealth snowball, to help them achieve their money goals,

The wealth snowball is a financial scheme of building wealth regardless of what your current financial status is. It allows you to grow your money, starting with a small amount and building on it until it becomes significant.

Building wealth observes two essential imperatives — be debt-free and invest.

BE DEBT-FREE

Avoid Debt

The general rule for avoiding debt is to spend less than what you earn. Aside from decreasing the possibility of borrowing, the remaining amount may be used to contribute to your wealth snowball.

Borrowing money is not wrong, but if you do it to buy something that depreciates or spend it on a non-priority item, it takes you a step back from attaining financial freedom.

List down and review all your expenses daily or weekly to keep track of where your money goes and determine your spending habits. Decide where you can cut back, e.g., reduce eating out from three times a week to once weekly, downgrade your subscriptions, etc.

Allocate a specific amount for your spending and stick to it. Refrain from impulsive buying.

Use your credit card wisely. Charge only the amount you can pay off in full on its due date; otherwise, your debt will be compounded, making it more difficult for you to pay. Better yet, get rid of your credit card and use cash for your purchases to control your spending.

Avoid promotional offers that simply delay debts, such as, “buy now pay later,” “low down payment plan,” etc.

Pay Off Your Debts

If you had accumulated debt before deciding to manage your money, the debt snowball method would help you get rid of that debt. Dave Ramsey, who popularized the technique, shares the following steps:

Step 1: List your debts from the smallest to the biggest, regardless of the interest rate.

The list must include all non-mortgage debt, such as credit card balances, personal loans, car loans, emergency loans, home equity loans, etc.

Step2: Make minimum payments on all debts, except the smallest.

Eliminate your debt with the smallest amount first. If you cannot pay it in full, put in the most significant amount you can to reduce this debt. Getting it out of the way should give you the confidence and the motivation to get out of debt. By getting rid of the most manageable debt, you can increase your payment for the next smallest debt.

Step 3: Repeat Step 2 until all debts have been paid.

Apply the payment corresponding to the smallest debt to the next debt on your list. Continue to pay the minimum payment on the other items on your list.

Ramsey suggests being current on your bills and growing a savings of $1000 as an emergency fund before starting a debt snowball to cover unplanned events that would need cash — minor car repair, broken house window, busted refrigerator, etc. The emergency fund will ensure that you do not incur additional debts for unplanned but necessary expenses.

INVEST

Going debt-free means you can add up to your savings. But allowing your money to sit around in your savings or checking account will not add an inch to your snowball. Besides your emergency fund, you must invest the rest of your savings to realize meaningful financial growth.

To illustrate:

John decides to put $3000 monthly into a savings account. At the end of two years, he has a total savings of $72000.

At the same time, John opened his savings account, his sister Mary opted to invest $1000 monthly, with a 10% monthly compounded growth. At the end of two years, Mary’s final investment value has reached approximately $107000. (Of course, there’s no legitimate investment that compounds 10% monthly. We only use that number to illustrate the power of compounding.)

The example shows that for a smaller amount you invest, you earn more than putting your money in a savings account, and this will accelerate the growth of your wealth snowball.

The earlier you start investing, the closer you will be to your financial goals. For each month that you postpone it, the required investment amount to meet your target increases. If you are wary about investing because you lack the knowledge, read articles and books on investing. You may also connect with people who are good at it.

Consider three factors when investing: savings, rate of return, and investment term. Most people focus on savings to increase their investment capital, but the two other factors are just as important in building your wealth.

Savings

More savings mean more contributions to your investment. Never cut into your savings because this will impact on your money’s growth. Your monthly contributions during the first couple of years will drive your wealth snowball, so you must commit yourself to a plan.

Aside from spending below your income, there are ways with which you can increase your savings.

Let your work bonuses and tax refunds go into your savings instead of allocating them for travel or for a luxury item you have been dreaming of. You will have them when your wealth snowball has grown.

Dispose of your white elephants and add the proceeds to your savings.

Make your hobby or your talent work for you. Get a side hustle. Open a small business, e.g., food. These will diversify your income streams. Apart from increasing your snowball size with the additional income, these should provide you a backup income source If something goes wrong with your main income stream.

Rate of Return

Rate of Return refers to the net gain or loss after the cost of an initial investment, expressed in percentage.

In building your wealth snowball, you must have a goal of how big your snowball should be at the end of a specific period. Your goal should give you an idea of how much gain to expect from an investment and make decisions based on an investment’s projected rate of return.

Bonds will have a low rate of return for as long as interest rates remain low. Investments with a high rate of return are high-yielding dividend stocks, emerging markets, exchange-traded funds (ETF), and direct real-estate investing.

However, going for a high rate of return means higher risk, lower liquidity, and more volatility. These are things you must consider, too.

Investment Term

The investment term does not necessarily refer to a specific timeline. Different investors would have different definitions of the investment term. For example, an investment with a maturity period of twelve years may be considered a long-term investment by some, but others would view it medium-term.

Most investors would consider those that you plan to hold for a maximum of three years as short-term investments. These are low-risk investments and may be accessed easily should the need to cash in on the investment arise. This would include a high-yield savings account and a Certificate of Deposits (CD).

Medium-term investments are those that you hold from three to ten years. Examples of this would be mutual funds, stocks, government bonds, and treasury bills.

Any investment that goes for more than ten years is considered long-term. A real-estate purchase and your retirement account are examples of long-term investments.

Decide on an investment term based on how you intend to use it — to have an additional income stream, to fund another financial goal, for retirement, to finance your desired lifestyle, etc. Depending on how much savings you have, you can diversify your investment portfolio to include all three investment terms in various forms.

Re-invest the income you generate from your first investment, so you now have two income streams from your initial investment. The more investments you have, the more income you generate.

Unless necessary, do not withdraw from your investment too early; otherwise, your snowball will not grow into the desired size.

Key Points in Building Your Wealth Snowball

• Set realistic expectations. If you are working on a low monthly contribution, do not expect it to grow incredibly into millions in three years.
• The best time to start your wealth snowball is now. Do not wait for the day when you are “making more money” because by then, it might be too late to secure your financial future.
• Your income level and sense of discipline will determine the size and speed of your wealth snowball’s growth.

Building your wealth takes time and patience. The growth that you experience may seem slow at first, but, eventually, you will realize that your snowball is passively growing by itself.

This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decision