In my previous blog post ‘the first step to freedom trough financial independence: realizing the reality’, I argued (using aliens and dinosaurs) that to retire early, one usually needs a massive amount of capital before being able to retire permanently or even partially. Since there’s no point in slaving away many years just to retire earlier, the only logical conclusion is to find a different source of income, and preferably multiple sources of income. And here I present you with a 1000 ways to make money with side hustles. Just kidding. There are plenty of articles on ways to make some extra money. I however, will focus on the different types of income.
1. Income you receive for your hourly labor.
Yes, I start with the one you dislike the most. Or maybe you don’t? I’m sure there are plenty of jobs you like doing, but don’t do because they are not paying you enough (or at all), or because of other circumstances such as: bad hours, location, societal pressure, pride, and so on. What if you could still do the job you love, right now or in the foreseeable future, if you life frugally?‘But Mike!’, I have a wife, and kids, two turtles and dog that eat me broke! How can I afford do take a job where I earn less!? Yes, I hear you. I never said it would be easy, did I? If you and your household are not all on the same train, your efforts will lead to a train wreck. So that’s the first place where you start: getting everyone on board. OK, lets pretend you’ve figured out to transform your family and adorable dog from our extremely consumer oriented life-style, to a bunch of extreme nature loving, flower smelling bunch of hippies who are willing to stop washing themselves and only eat grass to survive. When they are close to starvation, they can eat the two turtles. Problem solved right? Unfortunately, that's not enough. The biggest expenses most people have are housing, food and transportation. So the grass eating part only gets you so far. Compromises will need to be made on these main area’s. Once you’ve done that, you can see if your dream job might actually be possible. If not, maybe you can keep your old job but work less hours, giving you free time to do whatever you like.
2. Passive income from labor.
Passive income? Now we are talking! Time for another Warren Buffet quote: ‘If you don’t find a way to make money while you sleep, you will work until you die’.
While I strongly disagree with the fact that people should stop working, for the simple reason that work gives purpose and meaning to your life, Mr. Buffet does make a good point. There are only so many hours one can work during the day. No matter how high your hourly wage, your amount of working hours is limited. So, lets focus on this that keep earning money after you’ve already put in the work.
If you produce something, lets say like a blog, training course, book, video, song and so on, you can keep earning money thanks to new people who consume your content, while you only have to make this content once. OK, that's not entirely true. These days you need to create content systematically to grow your brand, basically turning your retirement into a new full time job until it might finally pay out. Then again, if you like doing that, and the ‘money to labor put in per hour ratio’ is exponentially higher than what you are currently doing, why not give it a shot? Another scalable businesses can be built by selling things on the internet. Since I’m not into importing crap from China and reselling it to customers while driving out local businesses, I suggest you google ways to do so somewhere else. I just want to emphasize that this form of ‘passive income’, can grant more income than you will ever earn working an hourly wage, and if you are lucky, you might even make money while you sleep just as Warren Buffet suggests.
3. Passive income from your capital.
While I basically destroyed the whole argument for living of a portion of your amassed wealth in my last blog post, due to the fact that you need a huge amount of money before you can live of its dividends, it still is a viable method if your income and savings rate are high. You can also start with a small monthly some and wait for compound interest to do its work. Albert Einstein said ‘Compound interest is the eight wonder of the world’, and he was right. Since I’m lazy I will copy paste a mathematical example of compound interest from one of the first web pages I found googling. I’m not sponsored by this website (I really need a sponsor though to stop living with my mom, so feel free to hook me up), but I will also link to this website to avoid being sued with copy right infringement. So here you have it:
“Compounding interest can make you a millionaire, especially if you are young! Take the median income in the United States today: $50,000 a year. Now the average 25 year old making $50,000 a year would only need to save and invest 10% and would have a staggering $2,434,221 at 65! This is just assuming conservative 10% returns in the stock market, and assuming he never gets a raise.” (Source: https://einvestingforbeginners.com/compounding-interest/)
So yes, anyone reading that might immediately be convinced and subscribe to whatever they are selling. And while I do believe that passive investing in an index fund is a way to enjoy the fruits of compound interest later, I still don’t believe waiting for 40 years is the answer to a happy life. Then again, maybe doing it for a couple of years, combined with frugal living and eating all your pets, might already give you enough leeway to at least partially do what you want with your free time. This is called the Barista method by the way: where you still work part time as a barista for example, because you no longer need to work full time to cover all expenses.
4. Income from your capital and labor.
Say you’ve saved up a bit of cash and want to make it work for you, but you don’t like the stock market or its compound interest, and can’t stop laughing when you see Albert Einsteins mustache. Fair enough. There are plenty of other ways to make your money work for you, but it will require you to do the work as well. Many businesses need capital. Maybe you are sick of sitting behind the desk and want to mow lawns? Even for this ‘easy job’, you will need capital to acquire all the necessary equipment, especially if you want to expand into other landscaping tasks. I’ve tried this by the way, the costs of the equipment was insane (750-2500 for a decent trailer, 10,000-40,000 for a decent van, 1500-2500 for a professional lawn mower, 600-800 for a professional hedge trimmer and so on). No matter what you chose, you might need capital (and more than you think) to pursue your dream job. Its also safer to start building a company like a side hustle. Most things take 3 years to succeed, like a horizontal hockey puck. You need to gain experience and built a clientele, before you can quit your full time job.
5. Real estate.
Investing in real estate could also be considered as an income based on your capital and your labor. I place this in a separate category however, because once you’ve set up a rental property and found a good tenant (that doesn’t break too much), the income becomes more or less passive. Also, the capital you use doesn’t need entirely to be your own.
To be clear, you still need a lot of capital and depending on your country the return on invest of investment might not be that great, but here’s the most important upside of investing in real estate: leverage. Lets be conservative and say you earn 5% on your investment portfolio in the stock market. To make 5000 you will need to have an investment of 100.000. However, to earn the same amount with real estate, the value of your real estate properties might need to be more (lets say 150.000-200.000) but your own invested capital can be way less. In my country (Belgium) you need a down payment of 20%. lets calculate this into further detail: 20% of 200.000 is 40.000. So in this example, even with the incredible low return on investment in Belgian real estate, you need way less starting capital to earn money. Also, I did not factor in the rise of the property value after one year, but only counted the rental income. A good rule of thumb by the way, is that you keep 80% of your rental income, the rest will go to insurance, repairs, taxes, and so on.
Another advantage of real estate: it doesn’t matter if the value of your properties goes up or down. Usually, the value of the properties stays stable and the rent stays the same or goes up (unless your tenants are cavemen and destroy it, or in case there’s a massive economic depression and rents go down, but lets stay positive here). In the stock market, the value of your portfolio and your income based on that portfolio will fluctuate way more.
So hopefully these 5 different types of income will be helpful to you, so you can decide which one best suits your lifestyle. In my next blog post I will focus on frugal living, since there’s no point in amassing capital to achieve FIRE if you spend it all due to lifestyle inflation. Lets see how many times we can bite that hard earned penny in half. You will be surprised. Oh, and it will feature the two turtles again. See you then!
- Mike.