When to Quit My Job - Part 2
After writing “When Should I Quit My Job”, I thought that it might be helpful to continue the discussion with an actual thought exercise.
Set The Stage
One thing I think everyone needs to know. Achieving financial freedom becomes exponentially easier once you can claim to be an accredited investor. An accredited investor is defined in detail by the SEC, and I do not want to get too deep into the regulations around accredited investors.
With that said, one of the qualifications to become an accredited investor is to earn over $200,000 as an individual for two years and reasonably expect to earn that moving forward. Being an accredited investor opens all sorts of investment opportunities that are closed to the typical household in America.
Plus, earning over $200,000 a year makes a lot of financial things easier. We are going to pick a scenario where the subject does not make that kind of cash and does not have access to those kinds of investments.
I get tired of reading about households that can shovel $50,000 annually into passive income investments. The trick for most of us is figuring out how in the heck we can earn an extra $5,000 a year to pay off a doctor bill.
The other story line that I get tired of is the guy who wakes up one day and decides to retire in five years. Read that article and you find out he was making $200,000 annually. He cuts his elaborate vacations each year in half, gets rid of the second Mercedes, and sells the lake house and, boom, he has paid off his debts and is putting over $100,000 annually into investments.
One caveat to these stories. It is a heck of a lot easier to replace a $35,000 a year salary than it is to replace a $200,000 a year salary. And the household or individual that is living within their means at $35,000 is well-equipped to keep it frugal until they have achieved their goals because they know how to be financially lean and tough.
Defining the Scenario
Instead of creating a hypothetical individual with a giant salary, we are going to pick a teacher making $1,500 in pay each month who has a goal to replace their salary with other income (passive or active).
So how can a teacher with $1,500 in take home each month generate enough cash flow on the side to give up the day job?
We will start our scenario in January of 2020 and our teacher wants to be financially independent in five years.
Exploit Your Strengths
Our first side hustle is going to be tutoring after school. One student for thirty minutes Monday through Thursday at $30 a student. Math teachers can tutor math or ACT/SAT, writing (English/History) teachers can tutor grammar or ACT/SAT, and elementary tutors can tutor math. Let us also assume that of the four days of tutoring, students fail to show up 50% of the time. This teacher is working in their classroom after school.
Mathematically this adds up to $240. It takes time to build clientele, and tutoring kids is not a steady business, so we are going to arbitrarily haircut this amount to $150 a month. There is still plenty of time and upside to capture more income by tutoring more, but we want to keep our numbers conservative.
We are also going to assume that this teacher has taken three months to build up their clientele, so we are now three months into our 60-month goal.
Leverage The Unexpected
Our intrepid teacher is now trucking along with 10% of their goal realized, but they have a crisis on our hands with COVID.
Our teacher is in quarantine trying to teach students, the tutoring business has fallen apart with social distancing, and no toilet paper is in the grocery store. Things have never looked darker, but our intrepid teacher follows a key timeless rule: never let a good crisis go to waste.
Our teacher puts an add out on Facebook that they are willing to help tutor online, and business explodes. The teacher can line up far more students, work more hours, and parents are even willing to pay $20 an hour while the teacher tutors three students at a time. Attendance is almost perfect because the teacher is taking a huge burden off parents stuck at home trying to home school kids and the money flows in from April through September 2020.
I do not want to make light of a real crisis for the world, but it is important to highlight that capitalism and opportunity can coexist ethically with tragedy while helping our fellow human. It is also important to highlight that opportunity comes in all manner of disguises. We must be ready to be victorious over whatever life throws our way.
There is another lesson here as well: some opportunities last a long time, some opportunities are temporary, but we need to always be evolving our business.
Over the six months our teacher teaches three kids for thirty minutes two hours a day at $20 a student five days a week. We assume 100% attendance because this teacher could easily double or triple that income, but we want to stay conservative. This amounts to $4,800 per month for six months. We will arbitrarily haircut this down to $3,000 a month to account for expenses and taxes. Over six months our teacher now has $18,000 in the bank.
Always Be Growing
Our teacher realizes that if they were to quit their job tomorrow, the stream of income from tutoring might dry up because they will not have the presence in the schools to connect with potential customers.
Our teacher decides to do two things. He or she takes their tutoring online with a company called VIPKid. They tutor English to kids in China (no knowledge of Chinese is necessary) and they now earn over $750 as a contractor each month. Our teacher has now replaced over 50% of their W2 income with two additional sources for cash flow which is slowly building up in a savings account.
During quarantine, our teacher continues to perfect his or her craft. They see trends in what students struggle with, and/or they research what it takes to pass the SAT, and/or they research how to help kids excel at taking standardized testing. Our teacher expands the tutoring options that they offer, continues to build out clientele, and their reputation grows.
By April of 2021, our teacher has developed a predictable income working from 5AM to 7AM tutoring through VIPKid and tutoring online or in person after school. Income is $900 each month in extra cash flow outside of the day job, and we now have over $20,000 in the bank.
Know Your Options, Focus On the Most Important
Our teacher is now focused on several endeavors which is not a bad thing. The challenge is that everything our teacher is currently doing requires them to exchange time for money at a rate that does not change significantly. Tutoring one hour yields a finite amount of revenue.
The teacher needs to figure out how to 1) increase the amount of revenue that can be earned for each hour invested, and 2) earn revenue without having to be present.
There are an infinite number of options. The teacher could create a blog or podcast or YouTube channel teaching students how to excel at the SAT. He or she could do the same and teach parents how to help kids with math or grammar. Or, the teacher could target other teachers and help them get established with VIPKid (the company pays for this). They could create content that they sell online, or they could bundle content created by others and sell that material online.
The important component is that the teacher analyzes the activity that takes the least amount of time and/or pays the most and works on it. Once that component is up and running well, the teacher can choose to continue investing heavily in that area to continue growing the income or move to a new stream of potential income and develop that.
The possibilities are almost limitless.
Put Money To Work
Our teacher is now 2.5 years in and still working towards their goal. We will assume that business has been doing well and the teacher is now earning close to their teaching salary in passive income. They have $40,000 in the bank, but the work is time consuming.
This is where most people we talk to stop. They have a great stream of income coming in and they start to spend it, or they fail to put it to work.
The first-place money should be put to work is in the business. This is an area where we see people fall short all the time. If you can grow your business by reinvesting in your business, do it!
The second-place money should be put to work is in passive income. Our teacher still has not achieved the coveted accredited investor status that would open up significantly more opportunities, but our teacher can start networking with people to look for places to invest where the return will be predictable, fairly stable, and lucrative.
Our favorite suggestion is always real estate. Most communities in our country are in a housing shortage, so property values continue to increase, and vacancy rates are low. With the amount of cash our teacher has saved up, there are giant swathes of the Midwest where our teacher could buy 2-3 houses and begin earning an additional $1,000 a month with significantly less work than they are investing in their W2 job or their side hustles.
Property management is not for everyone, but they could outsource this to a property management company or realtor. Finding good deals, managing a property manager, and learning the business is not easy and it takes time, but our intrepid teacher is up to the task, and once they secure a property, it now starts generating several hundred dollars each month without a significant amount of work.
Achieving financial independence is not an easy task for most people. Therefore, most people never achieve financial independence. It takes hard work and discipline day after day.
The purpose of this example is show that with discipline and action, it does not take a massive salary to achieve financial independence. It just takes time.