Set Aside 10% of Your Work or Retirement not 10% of your income!
We’ve all heard the pitches and seen the graphs: if little Johnny saves just 10% of his income from age 22 until age 65, he will retire a multi-millionaire! By scrimping and saving his entire life, he will be able to kick back and enjoy like! What they don’t tell you is that little Johnny develops a heart condition from all those drive-thru lunches working frantically at his desk, trying to meet the next “can’t-miss” deadline (have you ever tried missing one on purpose? It’s fun). Consequently, by the time he had finally saved enough to retire in style, he wasn’t healthy enough to enjoy it. Poor little Johnny!
Poor little Johnny followed the conventional wisdom of saving 10% of his income year in and year out for retirement using such traditional retirement accounts as his 401k and even a Roth IRA. Now, this is excellent advice, and I recommend you save at least 10% of your income every year for retirement, although I think it should be more like 20-30% of your income just to be safe (some might disagree). Nobody is telling you not to save money, because compound interest is indeed the 8th wonder of the world.
But there’s a better way, or at least a complementary way that, coupled with diligent savings, will help you reach your goal of early semi-retirement decades earlier than you would otherwise be able. It is not inconceivable you could reach the point of being financially capable of quitting the 9-5 world permanently within 5 years of implementing this plan. How? It’s simple: set aside 10% of your work efforts to income-generating side products in addition to saving the regular 10% of your income for retirement.
It is often said a person’s earning power, that is, the ability to earn an income is by far the biggest asset anybody has. This is entirely true, but what this doesn’t tell you is that you can magnify your earning potential several times overworking for yourself rather than somebody else. This means finding a low-maintenance side gig and banking the earnings. This is what Tim Ferriss refers to as a muse in his book The Four Hour Work Week. If you do it right, you can net an additional $15,000-20,000 per year per muse, each requiring only a few hours per week (or month, if you choose wisely) to maintain.
Your muse doesn’t have to be in an area you’re particularly interested in, although that will certainly help keep you motivated. It doesn’t have to be something you want to turn into a full-time business someday, although that’s great, too (J.D. at Get Rich Slowly did it, and seems to be doing very well for himself as a result). It’s simply a matter of recognizing a good passive income opportunity when you see it and taking action. As it turns out, taking action on an obvious slam-dunk idea is the hardest part for most people. That is why they continue grinding away at the 9-5 until they get their golden watch: they are all talk. But not you. You’re going to take action. Forever 10 hours you spend at work, you’re going to spend at least 1 hour building an alternative source of income (click here for 40+ alternative income ideas and resources). I chose to create not-really-passive online income using niche sites as my muse, but yours could be anything. Get out there and explore to find out what works for you.
Let’s try a different sort of math, but one that is related to all those “if little Johnny saves X% of his salary every year he will have $Y at age 65.” Instead of saving 10% of his income, let’s assume he spends 10% of his working hours on side projects that generate an extra $1,000 per month by the end of the year, a number that is extremely doable if you work efficiently, although you will doubtless start a bit slower as you learn the ropes of your chosen business. At the end of 5 years, you will be generating approximately $60,000 per year of extra income with a time investment of only 10-15 hours per week. What’s more, you could probably double or triple that number if you worked more (careful though, we don’t want to create another full-time job for ourselves) or invested a little money to help spur growth.
At this point, you can probably afford to tell your boss what he can do with himself. Or you can continue working for a few years, pocketing the extra cash flow or reinvesting it in your businesses until you feel ready to quit your job. The point is, it’s entirely up to you. And tithing just 10% of your working hours got you there in 5 years instead of 40. Now that’s what I call compound interest!