How to Apply the “Debt Snowball” to Acquiring Online Businesses
Dave Ramsey, the host from the Dave Ramsey Show and author of multiple best selling books, often talks about an issue many people have in their lives — debt.
Debt can be a vicious thing, and rarely is it a very useful tool. Knowing that so many people have debt issues, Dave came up with a strategy called the debt snowball to get rid of debt systematically and fast.
The cool thing is, you can use the debt snowball technique with buying online businesses, too.
While using this technique will start out slow, as any good snowball does, with enough discipline it can become a torrential avalanche that help you save up money and acquire bigger and bigger businesses.
First things first, though…
How Does the Debt Snowball Work?
The debt snowball is used primarily for people with a lot of different streams of debt. Many of you reading this probably have some debt you want to kill off, so this should be useful to you and help you have more liquid cash with which to start investing in online businesses.
The first thing you do is list out ALL of your debts in an itemized fashion:
- Debt #1 Amount Owed: XXXX Minimum Payment: XXX
- Debt #2 Amount Owed: XXXX Minimum Payment: XXX
- Debt #3 Amount Owed: XXX Minimum Payment: XX
Once you have them listed, you commit to only paying the minimum payments on your largest debts and focus on the smallest debt.
Say you have a minimum payment of $150 dollars on Debt #1 and $100 on Debt #2 but only $20 on Debt #3; you’d only pay those minimums of $150 and $100. For Debt #3, you will focus on paying it off with however much money you can spare.
Say Debt #3 is $50, so you pay it off in one month. You then take that $50 and apply it to the minimum of Debt #2. Once Debt #2 is paid off, you then apply the $100 from Debt #2’s minimum along with the $50 you were putting down on it to Debt #3.
Now you are paying off $150 plus the minimum of Debt #3. Once Debt #3 is clear, you’ll have breathing room of $300 a month to start saving.
That is the basic principle of the debt snowball. It’s simple to understand, but the power of having this discipline in business can be huge for you. You can learn more about the debt snowball on Dave’s site.
Turning Old Payments into a Business Acquisition Fund
Once the debt is cleared, that is when the fun stuff can start happening — such as investing in your future like buying an online business.
Even in our example above where you free up only $300 dollars a month, this method can lead you to significant results when applied over time.
Just $300 a month can equate to tens of thousands of words outsourced to writers at places like Textbroker or Hirewriters. In one year, that is $3,600 dollars saved up or invested in building out sites that can turn a healthy profit. That is plenty to build one big authority site or multiple smaller sites to get you going.
Invest that $300 partially into using keyword research tools like Ahrefs or SEMRush and learn how to use these tools, both of which have a keyword difficulty score built into their software to help you pick easy keywords targets (along with using their tutorials). This will help make sure you are only writing content or outsourcing that content for keywords which you can actually rank for on Google.
Over the course of a year, you might have a business making $1,000 a month, perhaps monetized via Amazon’s affiliate program.
That $1,000 a month combined with the $300 is now $1,300 a month or $15,600 a year.
If everything stayed the same, which is unlikely since if you continue to work on the site it will likely grow in income, you will have $31,200 saved up that could buy a business making between $1,200-$1,560 roughly a month, almost doubling (or perhaps more than doubling) your current ability to invest in businesses.
Now you have $2,500-$2,860 a month or $30,000-$34,320 dollars a year to invest in online businesses. Therefore, almost every year you can give yourself a raise by buying a new online business, that also means increasing your income by another $1,200-$1,560, while still only using the money you started off with at $300.
In just a few years, you will be able to buy bigger businesses that have even more profit and scalability to them. If you do this while remaining committed and disciplined, in just six years’ time you could be owning 3-4 online businesses that might earn you around $7,500-$11,500 dollars a month.
That is a huge increase year after year in your earnings by using nothing more than some simple discipline. If you select the right business model for yourself, each business will only add a few hours a month or possibly even less to your work schedule.
Give Yourself a Raise
Considering the average employee gets an annual raise (in the USA, that is) of just 3% a year, the amount of money you can “raise” for yourself using a debt snowball-like method is pretty astounding.
A person earning $60,000 a year could have raises over the next six years that might look like this:
- Year 1 = $1,800 for an annual salary of $61,800
- Year 2 = $1,854 for an annual salary of $63,654
- Year 3 = $1,909.62 for an annual salary of $65,563.62
- Year 4 = $1,966.90 for an annual salary of $67,530.52
- Year 5 = $2,025.91 for an annual salary of $69,556.43
- Year 6 = $2,086.69 for an annual salary of $71,643.12
Let’s compare these numbers to the six-year growth period of using that $300 to grow a business acquisition fund:
- Year 1 = No income growth. You’re building out your first site and saving
- Year 2 = Still working on your first site/ You might make a reasonable $15,600 if we go with our above example
- Year 3 = Business acquisition #1 adds $14,400 for an annual revenue of $30,000
- Year 4 = Business acquisition #2 adds another $14,400 for an annual revenue of $44,400
- Year 5 = Business Acquisition #3 adds another $14,400 for an annual revenue of $58,80
- Year 6 = Business Acquisition #4 adds another $14,400 for an annual revenue of $73,200
If each business only took 3-5 hours a month to manage, after acquiring four businesses plus your first site, you are looking to add 25 hours a month on the heavy side of maintenance. That is, if you built and bought them right (which is why we are here to help you do that to meet that criteria if time is an issue).
Still, slowly adding 25 hours to your work week for an extra $73,200 a year, isn’t that bad of a trade off. For most of you during this period, you can and will still be working at your job, so you will be getting those yearly raises as well.
My suggestion is to take that extra $1,800+ a month and pile it right back into business acquisitions. As long as you keep your day job, you can use 100% of all profits from your online endeavors in growing your portfolio even further and buying even bigger businesses with bigger earning potentials.
Taking Smart Risks
While the above is all hypothetical, it is important to realize that some of your businesses might fail completely and earn you nothing. Just like your job might lay you off and drain that annual salary down to a big fat zero.
Nothing is guaranteed in this life, but using a debt snowball kind of mindset to acquiring businesses makes someone just starting out realistically see how they could get the money together to eventually buy a six-figure business, and, eventually, even a seven-figure business.
Obviously, things could go the other way, too.
You could get a much higher raise than 3%; one of your sites might take off like gangbusters and break the $10k a month mark. You might flip some of the sites you buy for even more money than what you bought them for, increasing your speed in building your business acquisition fund.
The year is new and fresh. Now is the best time to get everything together and start planning for the long term. Whether you are just starting out and need to get rid of old debt first or if you are a veteran of buying businesses already, this kind of simple money management can lead to some very explosive year over year growth for you.
The one key ingredient is discipline.
And if you want to be an entrepreneur, you’re going to need that anyway!