Rediscover Your Various Income Streams & Save Like Crazy!

The following is an excerpt from How to Engineer Your Layoff. If you're interested in quitting your job and profiting from it, this book is for you! Today's post gives ideas on how to save and create income so you can quit your job.

“The creation of a thousand forests is in one acorn.” – Ralph Waldo Emerson

For most of us, our day job income is our primary income source. No wonder we are so reluctant to leave our jobs in the first place. If only we had enough side income to make up for our day job income loss, we’d be out of there faster than our manager can say, “Need you to stay the weekend to finish the project by Monday!”

You’ll be surprised to find a whole host of other income generating assets at your disposal other than your day job income. You just have spend the time to look.

Ask yourself the following questions:

• What is something I’m good at that I can teach someone else to do?
• What is my annual interest income from savings and CDs?
• What are my income producing assets?
• What are my spouse’s income producing assets?
• Which of my hobbies are in the highest demand?
• How are my investments positioned in the current economy i.e. aggressive, defensive, diversified?
• Is there a common problem your skills to solve?
• Do I have extra time in the day to hatch a business?
• If my day job income went to zero, what income streams are left?

I’m confident every one of you has something you are good at that can be put to commercial use. More concerning is the accumulation of passive income producing assets. In an environment of low interest rates, generating income is proving to be quite difficult.

It is vital that you have a runway of at least 6 months worth of savings, excluding your severance package before you decide to take off. Your runway will help you make rational decisions that will lead to better long-term outcomes. If you have created a perpetual runway with recurring passive income, all the better. If not, there is no time like the present to start saving aggressively.

In “Achieving Financial Freedom One Income Slice At A Time,” I highlight three of my passive income sources totaling around $6,800 a month plus up to eight other sources of other income.

It was only after I sat down and redid my budget that I realized what kind of income stream I was actually earning. For the past decade, I had no idea how much I was actually earning outside of my former day job since all of the proceeds were either automatically reinvested into the funds or saved. The power of time really makes a big difference.

Summary Of My Various Income Sources:

Passive Income Sources

• CD Interest Income
• Dividend Income
• Rental Property Income

Active Income Sources

• Tennis Instructor Income
• Online Advertising Income
• Online or Offline Consulting Income
• Trading Portfolio Income

Potential Bonus Income Sources

• Private Equity Investment Payout
• Private Real Estate Investments
• Primary House Rental
• A Working Spouse

Details Of My Various Income Sources

The first step towards financial security is to save aggressively. I’ve been saving 50%-75% of my after tax income every year for the past 13 years. I try not to be a miser by spending on things I enjoy, e.g. vacations, food, a home, and tennis. Where I did “sacrifice” was avoiding higher-end new cars (all but one were secondhand and under $20K) and exotic vacations.

I’ve predominantly invested my savings in long-term CDs that return 5% all the way down to 1.7%. Currently, my risk free return is averaging about 3.75% a year. These aren’t sexy returns by any means, but I sleep well at night and have also never lost money in this portion of my wealth for the past 13 years. A small portion of my savings goes into my trading account.

Passive Income

• CD Interest Income: ~$2,800/month. CD interest income will keep coming automatically for another 4-5 years and I don’t have to do anything except renew come expiration. It’s a sad fact that interest income has come down so drastically over the past 10 years however, nothing operates in a vacuum. Low interest rates also means low borrowing rates, and everybody who is able to refinance their mortgage should. For example, I refinanced in April 2012 for 2.625% from 3.125% for a 5/1 ARM, which helps make up for my declining interest income.


• Dividend Income: ~$1,200/month. Dividend income is mercurial at best. I have not focused on dividend income because: 1) the underlying values of dividend stocks have fluctuated so much over the past five years, and 2) I never withdraw any of the proceeds because I don’t need the income right now. Instead, I’ve focused more on capital preservation and growth. To preserve cash, companies have been cutting their dividends aggressively since 2008. Only now in 2012 are we seeing signs of companies raising their dividends, e.g., Wal-Mart and American Express. To be clear, all of my dividend income comes from active investments. None of my dividend income comes from my 401K because it can’t be touched until age 59.5.


• Rental Property Income: ~$1,500-$3,500/month after expenses. The range in income property has to do with a vacation rental, which has huge upswings during the summer and winter months, and fades during the months of May, October, and November. My city rental income is fixed every year and is very reliable given its location and the fact that there is another internet boom in San Francisco.

Active Income

• Tennis Teacher: I can teach tennis for about $40/hour. In fact, I’ve often toyed with starting my own tennis instruction website and supplement my passive income with 80 hours of teaching a month ($3,200). I’ve also fantasized about being a tennis instructor at the Four Seasons Resort in Bora Bora, but that’s just a dream right now as I establish my business. Tennis lessons at private clubs are around $80-100 an hour, so in a way, I feel like I’m doing a public service.


• Trading Portfolio: I have a $50,000 trading portfolio that I like to play around with on Etrade. Investing is in my blood and I’ve been doing it for the past 15 years when Ameritrade and Charles Schwab first went online. In the beginning, I had some major successes and epic failures. Nowadays, I’m more conservative, because I can still just as easily lose money as I can make money. Keeping up with the markets helps keep your mind present with what’s going on in the world.


• Online: Online income could potentially become one of my largest income sources now that I am no longer employed. Up until now and for the foreseeable future all income has been either donated or retained by Kansei incorporated. Given the low overhead costs, online income is by far the most efficient of all income streams. Online income can be broken down into affiliate income, banner advertisement, contextual advertisement, and product promotions.


• Consulting: In the spring of 2012, I launched Financial Samurai Consulting Services (FSOS) to help bloggers “Get On The Map.” Over the past three years, I’ve spent 30+ hours a week amassing over 5,000 hours worth of online knowledge. Financial Samurai has grown into one of the most widely read blogs in the personal finance space with ~170,000 pageviews a month and growing. I leverage my platform and help other bloggers get noticed and build their readership, authority, links, and long-term viability. Furthermore, I offer financial, career, and MBA admissions consulting.

Potential Bonus Income Sources

• Sugar Mama: One of the secrets to early retirement is having a working spouse. The secret to a happier early retirement is to therefore find a hot, rich spouse! You can do jack doo doo and tell the world how you retired early, so long as your spouse continues to come home with the bacon, pay the rent, and provide for healthcare. I’ve yet to find my sugar mama, so in the meantime, I’ll be working like a mad man!


• Private Equity: I’ve written off my one and only private equity invest to zero because so rarely do these private equity companies exit with a profit. At times, I really wish I had that $75,000 invested back! However, the company has been around for six years and survived the financial crisis. Hence, perhaps there is a chance I will not only get my money back, but also get a solid rate of return down the road. I’m not holding my breath!


• Private Real Estate: During the financial vomiting period of 2008-2009, I invested $50,000 into a distressed global real estate fund that was buying property at 15-30 cents on the dollar. The fund was a private offering made to a certain group of accredited investors. It is up about 120% in three years and spits out a reasonable 4-6% dividend yield. Once the fund is liquidated in several years, I calculate a roughly 25% internal rate of return. Looking back, of course I wish I had invested more. It’s just hard to drop dimes when things are blowing up left and right. This is a potential bonus income source I’m counting on.


• The Federal Reserve: If the economy really starts growing gangbusters again, the Fed could start raising interest rates sometime after 2013. This would cause a commensurate jump in US treasury yields, which would lead to higher savings interest, CD interest, and dividend yield payout ratios. The problem with this scenario is that the price for goods and services will have also gone up, offsetting increased interest/dividend income. Those who save more than they consume will still be net winners. In a rising economic environment you want to own real assets.


• Book Writing: Everybody should know that writing a book is not a lucrative business. After you account for your time spent writing and the money used to hire an editor, agent, and publicist to help make your book a success, you aren’t left with much! There’s a reason why you see so many writers wait tables and live with multiple roommates in dingy apartments. Even so, I plan to write a series of books because I love to write. There are so many books about how to get a job, but there are no books about how to profitably quit a job. I plan to fill these anomalies with my writing.

Adding up all forms of income, potentially leads to $25,000 a month in non day job income streams of which, $6,800 is guaranteed. With $6,800 a month, I knew I wouldn’t be starving on the streets, even in an expensive city like San Francisco.

Given my conservative nature, I only calculated my base case scenario of $6,800 when I engineered my layoff to become an entrepreneur. I didn’t want to spend money I might not have, because that is the root of all bad personal finance decisions. As a result, I constructed a budget around $6,800/month with the escape hatch of moving to a cheaper location if money started feeling tight. It feels good knowing that $25,000 a month is a possibility if everything falls into place.

I bet you can find additional income sources that you either forgot, or had no idea you could generate if you spend the time to analyze. When your back is against the wall, you will find ways to generate more income. Calculate your upper and lower income limits of additional income sources and be conservative.

More On Starting A Business

After starting an online business, I cannot fathom ever starting a traditional bricks and mortar business with commensurate high overhead costs. A top of the line dedicated server costs $250 a month whereas my favorite cupcake store has to pay $7,000 a month in rent. Talk about a huge operating cost differential!

It is very common for online businesses to have 60%+ operating profit margins and 35%+ net profit margins. According to a January 2012 study of 5,891 companies of all industries conducted by Aswath Damodaron of NYU, the average operating margin and net profit margin is 17.24% and 8.32%, respectively.

If you are going to start a business, think online business first. The potential demand is practically unlimited with the growth of internet penetration. Over 2.1 billion people are using the internet, up from just 1.3 billion six years ago. With a world population of 7 billion, all you need is 1/10th of 1% to get 7 million customers! Whenever you think about starting a business, think about scale and operating leverage.

My Personal Finance Blog

I never started Financial Samurai, my personal blog to make money. It is but an unexpected consequence of consistent writing and connecting with the community that I’m able to support my life solely from my site three years later. The main purpose of starting Financial Samurai was to keep in touch with friends, family, and colleagues. My immediate family lives 3,000 miles away and my friends in Asia and Europe are even farther. Sure, there is Facebook and LinkedIn to keep in touch. However, these platforms aren’t your own and have a limited ability to showcase who you are.

After leaving your job, you should spend a whole day connecting with all your professional contacts through LinkedIn and decide whether or not to include your closest relationships on Facebook. So long as you have a repository for where your contacts are held, even if you go for a year without speaking to them, you’ll always be connected online. The better way is to reach out to your business contacts once a month however, to make sure these relationships don’t go stale.

I recommend everybody start a personal blog on Blogger or Wordpress with their name as the URL e.g. johndoe.blogspot.com. Once you’ve set up your free blog, make sure to include a feature where readers can subscribe via e-mail or RSS. Then send a blast e-mail to your old contact list highlighting your blog to keep in touch. Those who care about you will sign up, and those who don’t have time will at least know that they can go to your blog to see what you’re up to. Just remember to abide by the rules in your separation agreement before you publish anything so you don’t blow yourself up.

If you are out of sight, you are out of mind. Your updates should be professional and non offensive. Make sure you are aware that anybody can read your blog, unless you adjust the settings to keep all or some of it private, so always review your posts before hitting publish. Use your blog to share your interests, personality, and your strengths. And think of it as a running resume. The easier you make it for people to reach you, the higher your chances are to make an impression.

It All Starts With Saving

In order to get money to work for you, you’ve got to accumulate money first! Thanks to a rough first job on Wall Street, I swore to always save at least 50% of my after-tax income if I ever wanted a chance to be free. I didn’t want to be somebody’s whipping boy forever!

It was painful to save such a large percentage in an expensive city like New York. However, I knew that all good things come with sacrifice. Instead of spending my year-end bonus on fancy toys or luxurious vacations, I either invested the proceeds in the stock market or in conservative Certificate of Deposits. By the time my third year of work came around, I was saving 100% of every other paycheck and 100% of my year-end bonus which sometimes accounted for up to 50% of my total income.

When you pay yourself first, you protect yourself from going overboard with your spending habits. If you always deposit 20% of your after tax income into a savings account before doing anything else, even if you spend the rest of your income, you will still have saved 20%. The key is to make reaching your savings somewhat difficult. By investing in CDs, I realized there would be an early withdrawal penalty. As a result, I have never touched my savings in 13 years.

Go Broke To Win Big Strategy

The key is to protect yourself, from yourself, and create that renewed sense of urgency to forge ahead and stay disciplined in your finances. You may laugh at the concept of protecting yourself from yourself, but everyone of us has the means of blowing ourselves up financially every single day. We are bombarded with temptations and we have collectively taken down the economy with overspending in recent years.

My advice is to open three separate bank accounts with the following labels:

1) The Go Broke Bank. The first bank account is for working capital needs, namely where your paycheck goes, and where you pay all your bills. This bank is your operationally efficient bank which has the best tools for bill pay with the most branches for accessibility. Citibank is a good example, a ubiquitous bank with good online tools, but provides ridiculously low savings rates and horrible credit card rates. Bank #1 is where you are constantly “Going Broke.” Your paycheck must be managed so that it lasts to cover all your expenses. But before you pay all you expenses, you must pay yourself first by transferring your target savings automatically to a Bank #2.

2) The Freedom Bank. The second bank is strictly for long term savings via money markets and CDs. This bank may not have as big of a footprint, but it doesn’t matter because you don’t need to access money from this bank. That’s what bank #1 is for. Due to lower overhead, Bank #2 provides better long term savings rates. Online banks such as Ally Bank, and boutique banks such as First Republic provide fantastic rates, often 500-100bps higher than the competition. Do not tempt yourself by creating a checking account. You want money to easily come in (ever notice tellers don’t require IDs when depositing?), but be very difficult to go out.

3) The Lockdown Bank. The third and final bank is for your debt, namely mortgages, personal loans, and car loans (horror!). By loading the majority of your debt with one bank, you compartmentalize your debt which may relieve you of any mental stress related to this debt. It’s easier to tackle your debt at one bank and employ the “Snowball Method.” Furthermore, from the bank’s point of view, you may get better rates given you are such a good debtor customer. You’re buying debt in bulk from Costco if you will, and in normal times, they want your business and will give you discounts. During crisis times, it’s also good to have all your debt in one place because your bank doesn’t want you to cause a default cascade and will do their best to work with you.

If the amount you’re saving doesn’t hurt a little, then you aren’t saving enough. Gradually increase your savings percentage so that you’ve got to make adjustments to your life. You’ll discover that after a while, you’ll become used to living within your more streamlined budget and will revert to your normal happiness level.

Savings Rates

If you save only 10% of your after tax income a year, you have to work roughly five years to accumulate one year of retirement savings equaling 50% of after tax income! Hence, after 25 years of savings you will only have 5 years left before your savings go to zero!

If you save 50% of your after tax income a year, you only have to work one year to accumulate a year of retirement savings. If you keep saving at this rate for 15 years, you will logically accumulate 15 years of retirement savings.

If you save 70% of your after tax income a year for 20 years, you will have at least 28 years of savings to likely last for the rest of your life!

Example. Use a simple $100,000 after tax disposable income figure, and a $50,000 yearly living expense target for retirement to work the math yourself. Save half of $100,000 = $50,000 = one year of retirement. Save only 10% of $100,000 = $10,000. You need to save $10,000 for five years to accumulate your $50,000 annual living expense!

The base case assumption is that one can live off 50% of after-tax income, whatever your income is. Some can certainly live off less, but for how long, and at what sacrifice? You can save 90% of your after tax income by eating cereal all day and live in a trailer, but who wants that lifestyle for the next nine years? You’ve got to figure out your own healthy balance between saving and spending.

If possible, I recommend everybody max out their 401K AND save 20% or more of your after-tax income after 401K contribution. It will be hard to do in the first several years of your career, but once again, nothing good comes easy.

Key Points

• Generate a list of your current and potential income sources.
• If you want to start your own business, think about scale and costs.
• Consider starting your own blog to keep in touch with old colleagues and clients.
• Pay yourself first and utilize separate bank accounts.
• If the amount you’re saving doesn’t hurt a little, then you aren’t saving enough.
• Aim to max out your 401K and save 20% or more of your after-tax income
• Create a budget based on your lower end of income estimates.

Comments

[Diolated]

Good post.

[SR]

"It all starts with savings" - Financial Samurai

Great post.

[My Money Design]

A TON of good information here. I can tell on my own quest for more income streams that I've got a long ways to go. But its nice to see someone else succeed and know that I am on the right track.

[Steve]

"You’ve got to figure out your own healthy balance between saving and spending." Right, don't start with the assumption you should save 10-15%, b/c that's from the same people with the assumption that you have to be a slave to your profession until you're 65. Its really weird that people who make $30K seem to always spend $27-$33K and people who make $100K spend $90K-$110K, etc.

Without considering your salary at all, think about what you really 'need' and go from there. If it turns out to be $30K, and you make $80K, then you get to decide if each additional cost is worth the sacrifice of time it does cost.

[Old Limey]

Our passive income streams at the age of 78 are:

7.0% - Two Social Security checks
10.6% - Two monthly pensions
15.6% - Tax deferred CDs purchased in October 2008 with 5% coupons
24.9% - Tax deferred Corporate Bonds, average yield 5.19%
41.9% - Tax exempt Muni bonds, average yield 4.96%
0.0% - Debt

If I had to start my working life today rather than in 1956 I am doubtful that I would have been able to duplicate my success. In this age of automation far fewer workers are needed than in my day, and those that are needed need exceptionally good skills and/or education.

Last night's "60 minutes" program showed how robots are being used widely to do very repetitive tasks in factories, warehouses, and assembly shops. The hospital where my wife spent two weeks last month was using robotic vehicles all over to move supplies of various kinds. It was fascinating that they had the intelligence to stop and let human beings go on their way down a corridor. It's a similar technology to the robotic vacuum cleaners that are available.

[Jane Savers @ The Money Puzzle]

I still have several years of debt ahead of me before I can invest in my future.

Do you live on/spend all of your passive income or is your CD income continually reinvested?

Do you reinvest the earned income in to the same area (CD interest in to more CDs and rental income into more investment properties) to keep your portfolio balanced?

I have almost $5,000 invested for my future. I have a long way to go and a short time to get there.

[Old Limey]

In our case the majority of our income is reinvested. I no longer buy CDs for obvious reasons. With bonds I can still find 5% coupons in the secondary market but the prices have edged up a few percent.

We don't spend much these days, especially since giving up foreign travel after our 2010 trip which was a cruise down the Rhine and Mosel rivers from Basle in Switzerland, through Germany, to Antwerp in Belgium.

Our largest expense these days is paying the state and federal taxes on the minimum required distributions we have to make in our IRAs when we move money from the IRAs into our Trust account.

[Mark]

He mentions that you can't withdraw 401K money until age 59, but that's not true. If you retire, you can actually withdraw 401k money at age 55.

[Mark]

Old Limey: You are really right about the situation with automation. It's one of the things that's destroying the middle class that often goes unmentioned. I have a feeling I will be one of automation's victims at some point. I don't know if my portfolio will hit the goal I need in time.

[Noah]

@Mark

If you don't mind me asking, what is your profession? It's never too late to learn some additional skills for your future :)