Thursday, October 8, 2015

Give Yourself a PAY RAISE!

Running your household and making the most out of your finances has plenty of moving parts.  As I continue with my “Why You’re Poor” series of articles you’ll notice that it involves what you spend your money on.   I tend to focus more on spending since most people have more control over how they spend their money versus how much money they earn in a given year. But spending is only one side of the equation to reaching your financial independence, retirement, and other worthy goals. Income is a determining factor in setting how much you can save, invest, and spend.  Since income sets limits on the amount of resources you can deploy elsewhere it's an important subject to discuss.  So I thought for today we can spend a little time on ways an individual can increase their income.  

I'm going to highlight a few ways you could boost your pay without ever haggling for a raise from your employer.  Getting a pay raise at work can be difficult as it requires both sides to agree on a set number/percentage. Plus it also requires you to show your employer why you deserved it in the first place. To give yourself a pay raise is actually much easier than it sounds.  I’ll go over some options available to the average individual, and see how just how these extra pay raises can affect the rest of your life.

  1. You invest in equities
There are literally so many dividend paying index ETF's, mutual funds, and blue chip stocks out there spewing cash its just sickening. They are just throwing money out year after year to investors who willingly gobble it all up. The underlying companies & funds put in all the hard work to earn you cash, while all you had to do in return was transfer some money into an account, and hit the buy button. While that's an oversimplification, when you think about it that's exactly what happens. So don't be LAZY! There will be plenty of time for that once we see how your money can work harder than you can.

Time for an example

Let’s go back to 2006. The market had not yet crashed and you were the proud owner of shares in the SPY Index Fund. If you had 100 shares costing $12,500 starting January 1 2006, you would have received $245 in dividends for the year. That’s a yield of 1.95%, which is actually quite average for an index fund historically. Now lets fast forward to 2014 which is the last full calendar year. Your shares of SPY would have paid you $384 in cold hard cash for the year. That’s a pay raise of 56.7% over 8 years.  Pretty darn good.  Go back and review your paychecks from 2006 and see if your employer raised your pay by 56.7% in that same time frame.  I bet not. Plus your shares would have been worth $20,554 on December 31, 2014.  Most people think that when you buy shares in a company the stock price should shoot up resulting in a large capital gain. Well let’s look at this differently. If you went into business for yourself are you not doing it to receive a paycheck? As the owner of all the shares in your company you're entitled to all the profits, if any. It’s the same as if you own shares in the stock market with the dividends paid representing your share of profits for doing absolutely nothing! 

So lets recap. In 2006 if you bought one hundred shares of SPY your original $12,500 investment will now continue to give you $384/yr in dividends(and very likely more going forward) for as long as you live! That’s a yield of 3.07% on your original cost. Despite all the bad press about the stock market that seems like a pretty easy job for your money to handle. Plus just think of how much cash your investment will be generating in another 10-20 years.

  2. Rent out your place
One of the greatest innovations from the internet was it's ability to connect people from all over the world. The real innovation came from the myriad ways we can now connect, and the form in which that connection takes place.  

The idea of renting out a home has been around for quite awhile. But it's only been recently with the advent of home sharing sites that you can quickly connect with anyone to rent out a spare bedroom, or your entire place while you're out of town. Previously you had to use craigslist or a vacation rental website that had their own unique limitations. Now renting out spare rooms can be tougher if you are a renter, or part of an association. But if you own a house with an extra room you should be using this tool to boost your income if you feel comfortable with the idea.

Let's say you have an extra spare bedroom that rarely gets used other than for storing your unused treadmill, and other purchases you've since forgotten. If you were to list that spare bedroom on a home sharing website for $70/nt, and netting 5 paid nights each month would bag you another $350 in extra income. That equates to $4,200/yr in income you're missing out on. Not a bad return for an activity that will barely take up any extra time. If this activity requires you to spend 15 hours a year to rent out the room you will be earning $280/hr! What are you going to do with all this extra money? Maybe send it back to the stock market where you can earn more money for doing absolutely nothing.

  3.  You take a part time job
"Hey, you said this wouldn't require any work!" I know at first glance this may not sound like you will be doing absolutely nothing, but hang in there for a bit.

Now understandably not everyone can work another job for various reasons. Either there are kids, a physical limitation, or your current job doesn't afford you that option. But let's say you are married and both you and your spouse decide to take on 8 hours each of part time work for 16hrs/week total. If you both can earn $15/hr after tax on your part time job your household would increase its wealth by $12,480/yr.

If you could invest that money earning 7.5%/yr for the next 10 years you would have $26,237. If you continue to work part time for 4 more years while adding the income to your investment monthly you could have $92,966 for a total gain of $30,566 on your part time income alone after 5 years. That's not an amount to sneer at. Even if you had kids during this time you could have put that money into a 529 education savings plan with their future education already paid for!

As a bonus this part time work doesn't have to be from another employer! You could earn the money from a hobby or current interest. If it turns out to be really successful you can turn it into your full time career. Many people have turned their part time passions into full blown successful companies. Doesn't that sound more enticing than continuing to work somewhere you may never get ahead?

So all together if you enacted all of these changes today you would have an extra $17,064 in the bank by next year. Plus you can repeat this for years to come multiplying your money with very little work in some cases.

Take some time to soak it all in and consider any of these options to increase your wealth. If you have another novel idea not mentioned here, by all means explore it! If you're not sure exactly where or how to start any of these endeavors, give us a call. We love to help.

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