This is a guest contribution by Leif Kristjansen of Five Year FIRE Escape
If you’re thinking about working extra hours or getting a part-time job, stop… or not. Just know that it’s not the best way that you can earn more. Here’s one truth more painful than stepping on a Lego: hard work doesn’t always pay well.
Think about the richest people in the world right now. Although they’ve paid their dues and still work hard, it’s physically impossible for the 0.1% to work thousands of times harder than your average Joe. Yet they make so much. Well, there’s a trick to those massive incomes.
Fortunately for you, it’s not some X-Men mutant superpower, and you can reproduce their success too. They just invest A LOT. If you want to make a million dollars while still obeying the laws of nature, that’s the way to really make a lot per hour. I’ll run some numbers about just how powerful investing can be, and how I did it myself. But before getting there, here’s something that you might want to know:
The average American college graduate earns $60,000/year working 45-hour weeks.
“That’s great!” you might think. (source)
I’m not saying that $60,000 is bad, but you can do better. All you need to do is stop relying on a job or a side hustle to get money. Here are two reasons you shouldn’t get too comfortable at $60,000:
REASON#1. It will take you 16.67 years to get to your first million.
Even if you have a sugar mommy or daddy to pay all your expenses for you, you are still going to take a long time to break into millionaire territory.
But if you’re like the rest of us average human beings who aren’t bankrolled, getting to your first million will definitely take longer if you just depend on a day job. Sadly, if you only have a superstar saving technique after you factor in expenses, taxes, and inflation you might even never make it to income replacement for your retirement years.
REASON#2. Looking at how much it is per hour, it really isn’t that much.
If you’re earning $60,000 and working around this much, you’re earning $26/hour. And remembering that a lot of people retire without ever getting advanced degrees really puts things in perspective.
As nuts as it may be to hear, you’ll probably be stuck in an okay-ish life forever without harnessing the potential of investing. So sure, maybe get extra hours to augment your income. Just know that you can get even more for your time by diverting it towards investing.
Implement a 1 hour/month investing plan in just 3 steps!
I’ve stared at my ceiling longer than this on days I don’t want to wake up. And if you have time to stage a concert in your shower, you can make room for learning an investing plan.
You don’t have to spend months studying about investing before actually getting started. Sure, it helps to know the ins and outs of equity markets, but it’s not a prerequisite.
Keep it simple. Focus on just one thing, and be great at it! The exact methods or strategies you choose aren’t terribly important, but having a strategy is important. Then if you follow a strategy ruthlessly, and ignore the financial noise, you can invest with very minimal effort and time.
I focus on simple investments in the form of index funds, but once again the important part is to ignore the noise. Here’s a beginner’s version of what I do:
STEP 1. Open an account with an online brokerage. Make sure to compare rates and look at reviews before choosing.
STEP 2. Buy index funds. More on this later, but the most popular is to buy the S&P 500 as an index.
STEP 3. Maintain a 70%/30% stocks-bonds split. Buy some bond index funds to balance yourself out. Keep it at this level by buying more and selling some of what you have twice a year.
Apart from real estate, I personally focus on index funds which are a little bit of every stock out there. I like it because I don’t have to think about stock prospects before purchasing them; in fact, I even automate the purchases. More importantly, historically these perform just as well as any other strategy:
1 – It balances your risk exposure. Yes, you’ll miss out on the highest-performing stocks, but you’re also avoiding the risk of losing it all with the wrong pick.
2 – They require almost no work. You literally just buy one index and you now own everything. Even comparing different index funds like VTI vs VOO, makes almost no difference. You can just make a plan and close your eyes.
3 – The returns are some of the best out there. The house (or in this case, the stock market) always wins. To be more accurate, it’s 99% of the time. Even the best and most educated mutual fund money managers out there only have a 1% chance of beating index fund returns.
4 – It’s budget-friendly. Fees are low, so you get more personal returns on the market’s returns.
The result? A way better hourly pay rate than working
Because you’re only spending an hour a month to invest, your investment earnings can surpass your day job’s hourly rate quickly. Using my 70/30 split like I recommended for some quick math, historical data tells us you should get an average of 9.1% yearly.
Let’s do the math. Based on the 9.1% yearly average growth and a one hour/month investing plan, you’ll earn:
- $91 for $1,000 invested. This is $7.58/hour.
- $910 for $10,000 invested. This is $75.83/hour.
- $9,100 for $100,000 invested. This is $758.33/hour.
- $91,000 for $1,000,000 invested. This is $7583/hour.
Not all investment plans are created equal.
I looked at the numbers. If you keep your time spent investing down your hourly earnings from investing will exceed those from working if you invest $3,296. You may even already have that much in your bank account!
Should you quit your job and finally be free from working the 9-to-5 beat?
Short answer, no. Where else would you get the money to invest?
For example, let’s say there are 3 high dividend stocks trading at a discount. So even if you know that these are great picks, there won’t be much that you can do about it if you don’t have any money.
From my point of view, investing is a better way of earning income than working, and you just need a bit of money to get the ball rolling.
So what’s a job good for? Exactly that, to get the ball rolling, then it becomes superfluous.
Ok, a job is also great insurance. If things turn sideways, you could end up losing a lot in the stock market. Even though jobs aren’t useful, I say keep one just in case.
Don’t work very hard at it though. Once you get that ball rolling, part-time work starts to sound pretty appetizing.