Short of winning a lottery, marrying rich, or coming into an inheritance, there are just two dials you can move to accelerate your journey to financial independence.
One is to go all-in on your day job in order to maximize your promotions and pay.
The other one, so popular in the FIRE community, is to spend some (or a lot) of your free time creating some income-producing assets (ideally of the passive kind!)
Admittedly, I’ve got a bit of a problem with how freely the word “passive” is being thrown around.
That being said, there is a lot of wisdom in finding a way to augment your employment income.
Ultimately, you’ll be able to sock away more money – and shorten the time to pulling the rip cord on your day job.
Best Of Both Worlds
In an ideal world, you would get to do both. Alas, we don’t live in an ideal world.
Instead, the real world which we occupy has things like children, family commitments, hobbies, demanding bosses, and an occasional pandemic.
At some point, things come to a head and you need to decide where to focus your efforts.
For many people, climbing the career ladder can be very attractive. After all, most of us are already working a day job.
Therefore, it’s often just a matter of putting a bit more time, effort, and strategy behind it. You set a singular goal and go after it, with no distractions.
In addition, do not underestimate the intrinsic satisfaction you will get from achieving true mastery in your chosen field.
But at the same time, focusing on advancing in the workplace can have many unintended consequences, not all of them positive.
The Dangers Of Climbing The Career Ladder
The biggest risk of being a highly paid employee is that from your employer’s perspective, at some point you just get too damn expensive.
This is especially true for back-office functions that don’t generate revenues.
In any kind of a layoff, it’s the expensive middle management types that are most at risk.
Once you are on the street, your relative seniority means that there are fewer job opportunities at your level, and it may take a while to line up a new job.
It doesn’t have to be a round of layoffs either.
The corporate jungle is a ruthless place. Chances are, you are just another obstacle on your colleagues’ envisaged career path.
They may have a big smile on their face, but they also have a big knife behind their back.
You may also simply become overspecialized, severely limiting your career options to a specific industry (i.e. supply logistics) or job function (accounting).
Finally, whatever you do, please don’t underestimate the chances or the speed of technological disruption.
While in the past it was blue-collar workers who bore the brunt of displacement, advances like robotic process automation are putting ever more white-collar jobs at risk.
For the reasons above, you probably don’t want to predicate your financial future on the whims of your employer.
It’s a bit like jumping out of a plane without a reserve parachute (or investing your entire portfolio in one stock).
Could end well, but do you really want to take the risk?
The Only Way Is Up
The biggest advantage of trying your hand at something outside your day job is that you simply cannot lose.
If things don’t go well, you’ve still got your day job to fall back on.
Alternatively, here are some clear advantages of figuring out how to earn even a few hundred quid per month on the side.
Advantage #1: More Upside
I have no doubt that you could be a highly capable CFO of your company.
But let’s face it – so could many other smart, diligent colleagues of yours.
And if the current CFO has no intention of leaving, what with expensive school fees and all, all of you are simply out of luck.
You have to move to a different company or keep biding your time while being a good corporate citizen.
There’s a reason why so many smart, diligent people are stuck in soul-sapping middle management jobs. The path ahead is blocked, a change in direction too risky.
On the contrary, nothing stands in your way of starting a side consulting gig or trying your luck with an online business.
Advantage #2: Smooth Out Your Earnings
As many people have found out this year, nothing is for granted.
Jobs disappear overnight, rental income dries up unexpectedly, dividends get cut en masse.
Side income streams are no exception. That being said, the more diversified your earnings, the more resilient they are likely to be.
This is especially true in the current environment.
Advantage #3: A Way To Challenge Yourself
I remember listening to a motivational speaker once, who said the following:
“The best things in life lie just outside your comfort zone”
At the time (I was in my early 20s), I thought it was a
crock of shit exaggeration.
In the two decades that passed, I’ve come to realize how true that is.
Every once in a while, I absolutely dread doing something.
It could be delivering a board presentation with limited prep time – or having an internal speaking engagement with hundreds of people in the audience.
And every single time, I come away from the experience absolutely exhilarated.
It’s a bit like my first ever solo skydive. An experience I found mortifying going into it – and have been relishing ever since.
And that’s before you consider the new skills you acquire in the process.
Advantage #4: Help You Transition Into Retirement
If you happen to be approaching financial independence (or just traditional retirement), leaving behind a regular paycheque can be scary as hell.
Having a side gig of sorts will go a long way in making you feel more secure.
Even more importantly, it will give you something to do, as most people struggle to find meaning in retirement.
There are many other advantages to exploring options outside your day job.
You’ll build your network. Possibly plant the seeds of a new career. Gain more control over your time. Master a specific topic (or two).
And for many people, myself included, it can provide a fantastic creative outlet.
To repeat my statement above, you simply cannot lose.
The True Value Of £1,000/month
To wrap it up, let’s put some numbers around the argument.
In the current environment of persistently low asset returns, valuations have skyrocketed.
If you wanted to generate £1k/month in bond income, you’d need to buy bonds worth £2.4 million.
£2,400,000 * 0.5% interest rate = £12,000 per year or £1,000 per month.
Thankfully (sarcasm intended), you *only* need half that amount if you want to put your money in a cash savings account with a 1% interest rate:
£1,200,000 * 1% interest rate = £12,000 / year or £1,000 per month.
Let’s look at a somewhat racier option.
If you buy £312k worth of an S&P 500 index fund, the underlying investments will generate approximately £12,000 of earnings per year::
£12,000 / year * 26 times (current S&P 500 P/E ratio) = £312,000
The challenge is that not all of these earnings will be distributed out in the form of dividends.
With the dividend yield of ~2%, you actually need a £600k portfolio to get your £1k a month.
£600,000 * 2% dividend yield = £12,000 / year or £1,000 per month.
Finally, assuming you believe the 4% safe withdrawal rate (for the record, I still do but many don’t), you need about £300k in the stock market to make the same amount.
£300,000 * 4% SWR = £12,000 / yar or £1,000 per month.
Here is the summary of where we had gotten to so far:
Now, I don’t subscribe to the argument that you can classify most forms of income as passive.
That being said, even if you “price” your £1k monthly income stream it at the traditional cost of equity (which is roundabouts 8%) that works out to a value of £150k.
Not exactly pocket change, even when you consider the work and risks involved.
So my two conclusions from the analysis above are as follows:
- Creating alternative income streams is certainly worth the effort, and
- For many people, it’s no longer an option. It’s a necessity.
About Banker On Fire
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Banker On FIRE is an M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.
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