Know Your Income and Increase It
Episode #5 of the course How to retire early by Maureen McGuinness
In the last lesson, we looked at expenses as one part of the early retirement equation. The other important part is your income, which will be the focus of today’s lesson. Most people will know what their gross salary is (their salary before any money is deducted for taxes, pension contributions, etc.), but few know how much they get paid every month (net income) after deductions.
By understanding what you have coming in and what is going out (from the last lesson), you will have a clearer picture of how much you’ll need to become F.I.R.E. First, you’ll need to get your last paycheck and write this amount down somewhere safe. This is how much you earn now, but after this lesson, you will have put together a plan on how to earn more than this.
Get Ahead in Your Main Job
If you don’t own a business and work in an office job full time, then a worthwhile pursuit is to focus on giving more value to your employer. Cal Newport wrote an excellent book called, So Good They Can’t Ignore You, which discusses career capital—ways to make yourself invaluable to your employer to enable you to negotiate a more competitive salary and/or more flexible working patterns.
Earn Money on the Side
In the knowledge economy and with the internet, there are endless opportunities to take what you know and provide value to others while getting paid for it. The focus here is on using something that you specialize in that others are willing to pay for access. Here are a few ideas:
Tutoring. You can teach your native language or a specific subject to support students taking exams. While the best-paid roles are usually tutoring in person, you can use the internet to find remote work. Just search: “tutoring in [your country].”
Supporting artist. This can be good for those who have a flexible schedule or work part time already because while there is work available seven days a week, most roles involve working on weekdays. I’ve worked as a supporting artist for a few years on films, TV series, and even a corporate shoot.
Write a course. If you’re an expert on something, there’s a good chance someone else is interested in learning about it. Highbrow is just one of several platforms where you can teach your field of expertise.
Sports referee. If you’re passionate about a sport, there will likely be opportunities to get involved with refereeing or umpiring in that sport. I used to play tennis competitively, and since 2016, I’ve been a tennis umpire on weekends, some evenings, and during most of my paid time off. I work at non-professional events to keep my skills sharpened, so during the busy grasscourt season (June-August) in the UK, I can work at the bigger professional tournaments, including Grand Slams.
There are also ways to earn more passively from your investments via dividends and interest. For example, when you buy an index fund, you can often choose between a fund that accumulates, where any dividends paid are reinvested, or a fund that provides income, where you are paid the dividends into your account every month or quarter.
Reducing Tax Liability
One of the barriers to earning more is that in many countries, the amount of taxes you pay also rises. So while you are taking home more salary before tax, once deductions are taken, you won’t always feel the benefit of a pay raise. Ways to reduce how much tax you pay include paying more into your 401(k) or pension via salary sacrifice. For early retirement, this could make sense, as most pension accounts aren’t accessible until you turn 55, but for anyone aiming to retire before this, it may not work as well.
Another way to reduce your tax liability is to put your net income into products that allow you to earn interest tax free. For example, in the UK, an ISA allows you to save £20,000 every year free of tax on any income or capital gains. In the US, a Roth IRA allows you to save $5,500 of your net income if you’re under 50 or $6,500 if you’re over 50 every year without paying tax on any gains or on withdrawals once you reach the age when it becomes accessible.
Tomorrow, we’ll look at what you currently own and how this in combination with your income and expenses will determine how much you need to become financially independent.
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