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.
Latest posts by Guest Poster (see all)
- Saving Money Effectively for a Better Future - November 27, 2013
- 3 Great Energy Efficient Apps That Can Save You Money - November 24, 2013
- 4 Ways to Keep Track of Your Investments - November 23, 2013