In my last post, I talked about figuring out how much the life you want is going to cost. I think that many of us get carried away in this section on the day-to-day. I realized that with my current income potential and propensity to spend, I would be able to retire at 65. I didn't like that. I want to retire at 45. Here's the thing. I can change my income by figuring out how to pay for the life I want (at the retirement age I want).
Figure out how to pay for it.
Were you a little shocked about how much your dream life costs? Maybe you only counted realistic expenses. Did you maybe realize that your current salary isn't close to your realistic expenses? Don't panic. We will figure out how to pay for it without going into debt.
First things first, let's not forget Uncle Sam.
Now, knowing how much you are going to spend is really nice. But we need to figure out how much we actually need to earn. And yes, we will do that without going to prison for tax evasion.
OK, a little algebra never hurt anyone. We need to back into the amount we need to earn. Here's the formula:
Income = Expenses / (1 – Tax Rate)
For example, if Uncle Sam & the state you live in charge you 25% tax, you need to divide your expenses by 75%. Now, you can fiddle with this by reducing the expenses amount by the tax deductible items (for example: retirement and mortgage interest) and then adding those things back after accounting for taxes on the rest. If you really want to get into the math, go for it, but we're keeping this simple.
In my example expenses of $98,000, assuming I'm taxed on all of it, I would need to make $130,000 per year. Yipes.
The good news is, now that I know how much I need to make, I just have to figure out a way to earn it. This right here, is the number one thing you can do to improve your finances. Earn more. Balance out your Income = Expenses equation. Don't cut your expenses until you have done your best to fill the income gap.
Earn more doing what you already do.
How do you make money today? It's probably most valuable to answer this as a household. Really think about the ways that you bring in income. Do you work a salaried day job? Is your spouse an independent contractor? Do you work hourly retail shifts over the holidays to pick up some extra cash? What can you do to earn more at that job. I like to break it down three ways:
- Ask for a Raise – If you're salaried this is a biggie. Have you ever walked into your boss' office and explained to them how valuable you are? If not, you may be due for a chat.Don't count out asking for a raise as an independent contractor either. How does that work? Your raise your rates. Find out how much your customers will be willing to pay and charge it.Does this freak you out? Don't let it. You are worth it. I've successfully negotiated 3 raises and I've helped independent contractors gain the confidence to raise their prices. I will write all of my tips down one day and link it here. Until then, I really like these tips from Ramit Sethi.
- Look for a Promotion – One great way to increase your income is by taking on more responsibility. More responsibility doesn't necessarily mean more time, but it does mean that someone will place a higher value on your time.What if the positions One of the best ways to weasel a a promotion is to offer to ‘help' someone out by filling in for a vacant position. Does the boss need someone to take on some reporting?
- Take on more Hours – Personally, I am not motivated by jobs where I can trade my time for dollars, but there are millions of people out there who love to work hourly. Are you maxing your allowed time? If not, and you need more income, you should be.If you've worked your full 40 hours, look out for overtime shifts and holidays that you can work. Do you notice that the boss only give those shifts to certain people? Well, it's time you speak up and ask for those shifts.
I start with this because maximizing your current income sources is low hanging fruit. All you have to do is reach out and grab it. Once you've harvested as much as you can, figure out how much more you need to make to have the lifestyle you want.
For example. I needed to make $108,000 per year before taxes. If my current job pays me $90,000, then I need to figure out a way to earn an extra $18,000. Now I can start to look elsewhere for income sources to fill that $18,000 gap.
Take on Additional Work for more Income
I want to take a second and say that this may not be necessary. You might not have an income gap after you've maxed out your current income sources. If that's the case, congratulations, and also, you can stop. You do not need to go about earning income outside of the things you've identified as your life desires. As a matter of fact, if you know in your heart you have found a way to pay for the things that your heart truly desires, then you will probably be happier spending your time on things that you value.
Ok, rant over.
Now for the rest of us who need a little extra dough. We want to do this in a way that is not horribly intrusive on the lifestyle we want, nor exhausting mentally and physically. Because, if our new income destroys the life we want, we are not really in a better place after all.
How do we find side income that does not beat us down? Do something that you would normally do unpaid, or a hobby that has monetary value. Do you know how to paint? Are you the go-to person when your friends need help decorating or organizing? Are you handy as a carpenter?
Invest your Savings
There are times in our lives where we have money that does not need to be spent yet. For example, when many of us got our first jobs it was like our bank accounts exploded. We didn't need to (and hopefully didn't) spend it all immediately. We earned a little extra before we had kids, and then we needed our full incomes. We made a little extra with our side income.
What do you do with these little surpluses? Invest. There are so many ways to invest. I won't try to cover them all here, but when I write a post, I will link to it. But what kinds of investments can really pay you income that you can spend now?
Investments should, in theory, return you more on the money you put in, but very few pay you real money now. Here are a few investments that will pay you now: Real Estate. Angel Investing (kabbage.com or others like it). Dividend Stocks. Annuities. Money Market Accounts. Certificates of Deposits. What others can you think of?
Let's recap. We're balancing the equation Income = Expenses. We're trying to to limit ourselves on the Expenses side until we've maxed out our income potential. We are going to try asking for a raise, working more hours (without going crazy), taking up side work and investing.
How are you going to raise income for the life you want?