Multiple Streams Income

When I mention my plans for early retirement to friends and family members, the response is generally somewhat dutiful. As the person with whom I am speaking ponders the subject of retiring early, the look of skepticism on his or her face is revealing. The line of questioning that follows usually tends to express the “have you really thought this through” attitude the person is trying to hide while trying to seem less critical – as if retiring in my 30′s is as mythical a goal as taking flight beneath a pair of wax wings. It seems that sometimes people even think it laughable.

The other day I brought up the subject with my brother.

“I figure I should be able to retire in less than ten years,” I told him.

He looked at me quizzically and hesitated, before replying “…what are you gonna do then?”

The question struck me in its matter-of-factness. I’ve thought about it, oh, plenty of times. But nobody has ever asked me point-blank like that before. I answered, then felt like I was in a Napoleon Dynamite movie. “Whatever I want. Take trips, sit around the house all day, work on my own projects, see movies, go out to eat, whatever.”

“Hmm…” he said, then didn’t speak again for awhile. My brother is a fairly quiet person to begin with. Then finally, “that’s cool.”

Despite being a man of few words, he made me really think about why I’m striving so hard to become retired. I’ve interrogated myself so many times that sometimes I feel as if I’m repeating myself while having a conversation with someone I’ve just met. Do I want to retire because I’m lazy? Not really… I’d say I work pretty hard. Is it because I hate my job? Not at all; actually I’ve got a great job. I enjoy what I do, the pay is good, and the people I work with are good too. So then what is it, really?

For me, the bottom line is security. Or at least, a greater level of security than I feel like I have now. I always just feel better when I’ve got a few grand stashed away in my savings. Maybe because I’ve lived through times where I wasn’t sure I was going to be able to pay my bills the following month, or maybe because I’ve had health issues that have kept me out of work in the past. It’s also partly because I don’t like feeling like I’m a slave to one means of making an income. Even though the company I work for treats its employees really well, I can’t get comfortable with the fact that, were I to lose my job and find myself unable to get another, a day would come when those savings would run out and I wouldn’t be able to support myself anymore.

There are always risks, of course – no matter where your money comes from. But a great deal of the age-old wisdom is true:  the fewer your dependencies, the more each one of them hurts to lose. Job security only lasts as long as your job does. For me, the ability to stop worrying and realize that I’m working toward a day where I won’t have to be reliant on just one thing is what makes this worth it to me. People might look at me like I’m crazy, but I don’t mind. It’s not about proving anything to anyone – not even myself. I want to retire early so I can not retire – so I can keep doing what I’m doing because I want to, not because I need to.

“If you always spend as much money as you make, you will never make any money.” – Jay Staudt

Normally I’d be hesitant to quote myself if it weren’t for the fact that this is something I have probably said to my girlfriend far more often than she would have liked to hear it. We were going over a new budget this week to figure out if she could afford to change to a more expensive living situation. After everything was taken into account, we arrived at a figure that would have essentially balanced her budget every month.

While she thinks that balance means affordability, I do not see eye to eye with this line of reasoning. The reason for that is because the typical budget does not take into account the “unknowns” that befall us in everyday life. The bank fees, the traffic tickets, the birthday gifts, the late-night ice cream runs to 7-11, the flu medicines, that super-cute pair of shoes, the flat tire, the overage minutes, and the one-time, spur-of-the-moment purchase add up to a whole lot of extra money going out the door. These are the kinds of things we don’t think about. If my life always went perfectly, I’d have a lot of extra $5 and $10 bills in my wallet.

We are in the midst of a full-on savings crisis right now. The savings rate in the United States is abysmal. You may not agree with me, but I believe that much of the housing crisis has been caused by the fact that when so many people lose their jobs, they have absolutely no nest egg to fall back on. Many people are living with ridiculous amounts of high-interest credit card debt because they don’t have the self-discipline to live within their means.

Just imagine if everyone in this country had between three and six months’ worth of expenses saved.

Instead of immediately falling behind on their mortgage payments, a family who loses its main source of income is able to pinch pennies and be fine for half a year. But as a nation (and in fact, as a global community) we have collectively thrown our hands up and cried “woe is me, for an unexpected error has occurred!” Rather than realizing our fiscal irresponsibility, we blame the government for letting the economy fail. The government takes pity and says, even though we haven’t been responsible, that we can adjust our house payments and take handouts to make things right.

That is why I always budget for the worst-case scenario. If my cell phone bill is usually $82/mo, my budget says it’s $90. If I’m spending all my money on things that will vanish as soon as I stop being able to pay for them, then in reality, I have no money. All of my funds are just going toward things that allow me to keep up a certain quality of life, and not toward things that will extend that quality, like a savings account, investments, or the paying down of mortgages and other debt.

With the amount I have saved and invested right at this very second (not including my 401k) I could quit my job tomorrow and live comfortably for 7.4 months. That’s after I pay off my revolving monthly credit card that I use to buy gasoline and groceries. But don’t worry, I don’t sleep any better at night… or maybe I do. Are you ready for the End of the World?

Are you familiar with pyramid schemes? No, I’m not suggesting you start one. I want to talk about how and why pyramid schemes work, and relate some of those concepts to you. Knowing more will positively affect the mentality you have about your finances. I am not, nor would I ever, suggest or endorse that you be involved in a pyramid scheme. But I definitely want you to start considering the value to be gained from learning about the various ways money changes hands.

How Pyramid Schemes Work

To describe it simply, the basic pyramid scheme functions by preying on greed. It works based on the premise that by sacrificing a little now, you’ll gain a lot down the road. Usually, involvement in the scheme requires the victim to purchase some kind of information or product that is supposedly the best of its kind or is a well-guarded secret. When you buy into the scheme, you’re essentially buying the right to then sell that information or product to others.

Just imagine if you were such a great salesman that you were able to convince a million people each to give you a dollar. You’d have to be very convincing, of course. Now think about if you told each one of those people that all he or she has to do is pay you $1, and in return you’ll tell him or her how to easily make a million dollars. For many people, obtaining such potentially profitable information for such a low price is enticing. While this is an extreme example, this kind of salesmanship creates massive amounts of intrigue and leads a great number of people to say “well, what have I got to lose? It’s only a dollar!”

The ‘base’ of the pyramid grows every time someone who has sacrificed their dollar wants to make it back. So you have a million people each trying to convince a million more to part with their hard-earned dollar. The best and most convincing salesmen get the dollars of their friends, family members and co-workers, while the bad ones (and the overly pushy ones) just get on their nerves. Each person at the base of the pyramid becomes one of multiple income streams for the person at the ‘peak’ directly above them. There are more elaborate and complicated versions of the pyramid than the one I described to you above, including schemes where the base pays ‘membership’ fees or some other type of recurring charge.

And Now, A Story

When I was in middle school, a kid I knew walked up to me before first period and asked if I had a dollar. He told me he didn’t have lunch money and would pay me back the following day. Even by the tender age of 12 I had already begun to develop shrewd financial tendencies, and that, along with the fact that I knew him to be of somewhat questionable character, led me to turn away his request. Lucky was I, for later that same day (during fourth or fifth period, I believe) we had a class together. Imagine my surprise when he pulled a fat wad of $1 bills and several coins from his pocket and began to count them at his desk. His friend – the girl sitting next to him – saw the pile and exclaimed, “I thought you didn’t have any money!”

“I didn’t,” he replied. “Until I told everyone.”

I watched him count out no less than twelve dollar bills and a few bucks more in coin – at the time, that would have been enough to buy lunch in the school cafeteria for nearly two weeks straight (a day’s lunch cost $1.65 in the mid-90′s). So what did I learn from this experience? That money finds those who have the wherewithal to get it.

You don’t have to be dirty and underhanded to make money, but it will make you that way if you let it. Just as greed leads people to fall victim to confidence scams and pyramid schemes, wisdom leads people to make the most responsible choices based on knowledge rather than conjecture. Don’t guess or gamble, take risks or roll the dice without doing your due diligence and having a backup plan.

Building Your Pyramid

Now that you know a classic pyramid scheme relies on the greed of the base to benefit the peak, realize that there are tons of ways to make money legitimately and without pulling the wool over anyone’s eyes. You can easily build a pyramid and collect income from multiple sources without it being a ‘scheme.’ At the time of this writing I have seven different online income streams, and I hope to grow that number moving forward. Each source in the stream may only yield a few bucks, but if the total is enough to buy groceries for the month or pay my auto insurance bill, I’m satisfied that the time spent setting them up was worth it. Here are some ideas for ways you can start building up small amounts of extra income online. Some require more technical knowledge, some more artistic talent, and others just require you to get traffic to a website:

• Stock photography sites
• Stock media sites (audio clips, video clips, website themes, 3d objects, 2d graphics)
• Amazon affiliate program
• eBay partner network
• Google AdSense
• Mobile application development (android, iphone, blackberry, windows)

You’ve likely heard the old euphemism “there’s no magic bullet.” It’s used to illustrate the fact that shortcuts to success are few and far between. That phrase isn’t entirely true when it comes to money, though – winning the lottery or being the beneficiary of a deceased relative’s fortune sound like two magic bullets to me. But regardless of how likely or unlikely it is that some windfall financial event will happen to you, one thing remains true: it is possible to mishandle any amount of money. From the alcoholic homeless man down the street to the federal government, people are managing sums of money across the board with great incompetence. Professional athletes and lottery winners alike have won or earned millions upon millions of dollars and frittered it all away, only to file bankruptcy as a result of their perceived financial invincibility.

There is a popular and widely-known system from a modern financial guru that teaches people how to radically turn their debts around. There’s a lot of great advice in this system – or so I’ve heard; the problem is, it’s very expensive. I believe that especially for someone trying to get out of debt, buying something they can get for free is a waste. That’s part of the reason I created this website in the first place – it’s my forum to share everything I’ve learned about money and personal finance in my (relatively short) lifetime, and to have it all written down both for my personal recollection and to help anyone else that might get something out of it. Every word on this site is free, and not in the “buy this now and get that free” sense, but in the completely-everything-you-read-or-see, no-strings-attached sense. I don’t sell or ‘give away’ e-books, I don’t have a members-only section of the site, I don’t pitch sales for pyramid schemes, and I don’t give privileged information to only a select few. But I digress.

In the absence of a magic bullet like the ones mentioned above to solve all your debt problems, all that exists is self-control. The financial system I mentioned above is filled with common sense rules and advice that anybody with some discipline can follow and put to good use. I’m going to lay it all out here, in this post, for free. But first, there are two things I need you to understand before we go any further. Be warned – I’m going to be hard on you. This is the plain truth, after all:

1. You are in debt because you cannot control yourself.
2. The only way to get out of debt is to learn how.

Plenty of hard luck stories exist, and I understand that sometimes the unexpected happens. Huge medical bills, home repairs, automobile maintenance, etc. can all be a big kick in the pocketbook. But part of my stance, and I would argue this vehemently, is that part of financial responsibility means being prepared for the unexpected. If at any given time you don’t have at least two months’ income sitting in a savings or easily accessible investment account somewhere, you are not prepared. You aren’t ready to be reading this and you should stop now.

Too many people have become uneasy at the thought of having extra money. They feel like saving or investing it is a waste because it’s just sitting there – it might not earn enough interest, or else there is the possibility of investment losses, so therefore it’s better to spend that money instead, many would say. Others start earning some bucks and get caught up in “before they hatch” syndrome – a common problem, as I have fallen victim to in the past, where we think “on this date, I’ll get this much money from this source, and after that I’ll be getting some money from that source,” etc. Looking into the future for your income sources is wise, but counting on them to come through and spending it before it’s in your hot little hands is very, very unwise. Repairs and medical bills might not be such a big deal if more of us had the wisdom and foresight to plan ahead and save.

So if you have some money put away, you’re probably in better shape than most of your peers. The next step in escaping debt is to spend less than you earn. Blah blah, I know – you’ve heard it all before. But can you actually do it? Do you have the ability to put that surplus $500 or $1,000 away instead of buying an extra piece of furniture or a new TV? The inherently obvious truth is that spending more than you have now, just because you’re counting on having it later, is just plain ignorant.

The third and final step in getting out of debt is to line up all your debts from smallest to largest. It’s that simple – don’t pay any more than you have to on any of your debts except for the smallest, which you should be paying as much as possible. When that’s paid off, lump all that extra money into paying off the next largest debt, and so forth. If you don’t discipline yourself, it’s likely that you’ll be in debt (or in and out of it) for the rest of your life. Pay everything off and then save, so that the next time you’re tempted to go into debt, you won’t have to.

Read lots more on multiple streams income – stop letting your money control you!

Don’t worry, I’m not going to re-hash the same tired financial advice you’ve always heard about the tax advantages of your 401k. Rather, I’m going to explain to you how the company you work for is actually paying for you to withdraw your retirement savings early.

If your job offers an employer match to your retirement account contributions – normally 50% of your contributions, up to a certain percentage of your salary – they will offset the taxation you’ll undergo if you pull that money early. Obviously if I want to retire early and liquidate my 401k, Uncle Sam is getting a huge slice of my pie. The key lies in the fact that as your employer matches 50% of your contributions, this results in employer-contributed funds amounting to 33% of your final account balance.

So let’s say I make $50,000 a year and I contribute 4% of my salary to my 401k. If my employer match is half that (2% in this case), I’m putting down $2,000 a year and my employer is contributing $1,000. Now to simplify this example, let’s say I have been working for ten years and I have $30,000 amassed. Again, for simplicity, we’ll say the market has been fluctuating so much that I’ve come out break-even. Doesn’t really matter how much extra I’ve earned for the purposes of this example.

$10,000 of the balance has been put there by the company I work for. Were I to withdraw the whole $30,000 early, I’d take a 35% tax penalty on the balance (25% tax bracket + 10% early withdrawal penalty). That comes out to $10,500 – just slightly more than the amount my employer has contributed. So essentially, I’m getting back just about all the money I put into my 401k – before taxes.

Now consider this: if I were to have put that money into a Roth IRA instead, I’d be subject to normal taxes before it went in anyway, right? So let’s say that 4% ($2,000) per year is taxed at 25% and put into a Roth. Not only do I not have the cushion of my employer match if I do wait until full retirement age to withdraw; I’m also only able to contribute $1,500 per year to my Roth. After ten years I’d have $15,000 assuming a break-even earnings rate.

In essence, this simplistic example shows how the employer match granted by the company you work for actually pays for you to take your retirement money early. I’m not trying to advocate that you pull your 401k before you’re due – that would be stupid, unless you are already set up and don’t need the full balance to live out your remaining years. As for myself, I plan/hope to retire well before age 59.5, so taking an early withdrawal of my balance is something that may one day become a legitimate option for me.

Most (if not all) financial advisers will caution you strongly against early withdrawals from a retirement account, unless it’s your last option, and your multiple streams income are not yielding enough for you to stay out of some seriously insurmountable debt. This example is simply to illustrate the fact that, on a worst-case-scenario basis, liquidating early will net you all the pre-tax money you’ve put into your account in this scenario. That’s not to say how much you stand to lose by making such a move, though.

I explain my core belief about money to my friends this way: there is a great disparity between being rich and being wealthy. A rich person receives his or her paycheck and says, “I’m rich!” The money is completely gone before the next check rolls around, or in many cases it was gone before that check ever came in.

This same person gets a pay raise and exclaims gladly “Now I am even more rich!” The increase in cash flow, in the ‘rich’ person’s mind, is equivalent to an increase in their day-to-day means – what they can spend. The extra income is used to buy more expensive versions of the same things this person used to buy with less money, and/or to purchase unnecessary trinkets and luxury items. As they collect paycheck after paycheck, the money goes out the door just as quickly as it comes in. This is the never-ending cycle of the “rich” person.

Now, let’s talk a little about wealthy people.

The wealthy person receives his or her pay, and thinks “This is good. I need money to live. Now, what is it, exactly, that I need?” After making the necessary arrangements to have their needs met, the remaining money is invested, saved, or used to purchase things that will benefit the wealthy person and/or move him closer to his future goals and pursuits.

When the wealthy person receives a raise in pay, the extra money is just more to sock away or use otherwise to increase the value of that person’s life.

Rich vs. Wealthy

So in the simplest terms, the rich person lives at or above his means, while the wealthy person lives below them.

Whether you have a single source of income, or multiple income streams, the ability to handle your finances is the difference between being a rich person and being a wealthy person. Which type of person are you?