The Value of Earning a Side Income

I never appreciated the value of a side income until I started earning one.

Before I started blogging, all my income came through a regular job lost most people. But when my blog started making a little money, we kept the cash separate from our monthly budget. We gave some to charity, which was very rewarding, and the rest we saved and paid down debt (mostly credit cards and school loans). And in a very short amount of time, the side income wiped out all of our debt and is now helping us save for retirement.

And here’s the key. Even a relatively small amount of extra cash can go a long way. To show you what I mean, let’s look at two examples–retirement (with a good chunk of side income) and credit card debt (with a relatively small amount of side income).

Side Income and Retirement

We’ll start with retirement. Let’s assume that during retirement you need $100,000 a year in income (we’ll ignore social security and pensions). Most retirement experts tell us that you can safely withdrawal 4% from your retirement investments each year. Take any more out, and you risk running out of money in retirement.

So to generate $100,000 a year with a 4% withdrawal rate, you need a retirement nest egg of a whopping $2.5 million. For most of us, amassing that kind of money is just not realistic. But let’s look at what happens when you generate some of your retirement income needs from a side business.

Let’s assume you can generate $25,000 a year in extra income during retirement. Now you only need $75,000 in income from your retirement funds. And that means your magic number is $1.875 million ($75,000 / 4%). That’s still a lot of money, of course, but a lot less than $2.5 million. And if you can generate $50,000 a year with a side income, your investment needs fall to $1.25 million. And for a lot of people, that could mean an early retirement.

Earning this kind of money in retirement may seem impossible. And while it’s no easy task, many folks that I know have started a blog and are earning four and even five figures a month. So it can be done.

Side Income and Debt

Now let’s look at a financial hurdle many of us face—credit card debt. Let’s assume you have $10,000 on your cards at an interest rate of 15%. Many credit card companies set minimum payments at 2% of the balance. If you make just the minimum payment, it will take you an eye-popping 424 months to pay off your debt. And your interest payments will total more than $15,000 (see this handy calculator for the details).

Now, if instead of making just the minimum payments, let’s assume you pay $200 a month until the debt is extinguished. That step alone reduces the time to pay off the debt to 79 months and your total interest down to about $5,800. And that’s why making just the minimum payment is a bad financial move. But let’s take this one step further.

Let’s assume you have a side income of just $100 a month that you also put toward your debt. That extra $100 payment reduces your time to freedom down to 44 months and total interest charges to just over $3,000.

There are lost of ways to earn extra income. As just one crazy example, you can make extra cash writing Amazon reviews. And as you can tell from the above two examples, even a small amount of additional cash can go a long way.

This article comes from DR, the founder of the popular personal finance blog, The Dough Roller.

15 Responses to The Value of Earning a Side Income

  1. good reminder, and as you can imagine this one resonates real well with me. for me the key is to increase “passive” side income. one can make good money freelancing particularly in a high dollar value skill-set/industry, however it is really the freedom and flexibility that one seeks with that extra income.

  2. I totally agree with this – I’ve been wanting to start a business for a while, and I didnt want to pull the cash from my regular earnings – so I’m saving up my side income earnings to do it instead. I’m almost at my goal too!

  3. Good post, and I like the way you utilized the reality of people needing massive nest eggs to be able to have really comfortable income in retirement. It’s that nest egg as source of cash flow is what many people need to spend more time thinking about in general, and your tie in with extra income effectively shows how a side cashflow stream can really help later in life.

  4. Keeping side income seperate really is a great idea, otherwise you might inflate your lifestyle. :-) Good post, it’s fun to see the numbers laid out.

  5. >> So to generate $100,000 a year with a 4% withdrawal rate, you need a retirement nest egg of a whopping $2.5 million.

    - That is in today’s dollars. If you account for inflation, the nominal numbers get higher based on your estimates for returns on savings and expected inflation rate.

  6. Great post! A little does go a long way. The extra income can also be use to fund other business ventures. I was able to use the online income to pay for the rental expense in November. Once the rental generate income, I can use that for other investment!

  7. I can’t imagine NOT having a side income anymore. I’ve become addicted to building new streams of income.

    When I first started bogging we were deep in debt and we actually had a negative income for awhile because our bills got out of control. Now we’re pretty much debt free outside our mortgage and I’m able to use the extra income to start building for our future.

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