small income diversification to reduce the size of your retirement stash
These small guys all add up to a veritable force!
When you start to learn about investing, one aspect that quickly becomes apparent is very important, is diversification.
But do many investors think about income diversification? I would bet they don’t.
I would bet that in the main they are all about getting a big pay packet from a corporate job and trying to stuff as much away into their investment accounts, at which stage they will start to worry about the diversification factor. This obviously works well until the day they get canned.
I started to think about diversifying my income away from my day job a while back by trying to get some side gigs in the software development world, but you needn’t go anywhere near to that trouble to earn a bit of extra income on the side. In fact I bet most of you are already doing the things I mention in the table below!
But the key point is that it occurred to me, what are these small sources of extra income providing, in terms of helping us retire early? They are possibly being overlooked by all of us when calculating our magic number: the size of the stash at which we’ll feel comfortable saying sayonara to the day job and strutting off into the sunset.
size of stash replaced by small income diversification table
Below is the table for our “extra income” for 2015, with an extra column which is “Replaces size of stash”
You need roughly 25x your yearly expenses to retire, therefore if you receive any extra small income it is safe to say it will reduce the stash you need by “the extra small income x 25”. This is how we are calculating the “Replaces size of stash” column.
| Total earned per year | Replaces size of stash | Notes | |
| Interest TSB L + Cashback | 54.84 | 1371 | 1 |
| Interest TSB A + Cashback | 47.76 | 1194 | 1 |
| Interest Santander | 111.72 | 2793 | 1 |
| Cashback Santander | £0.00 | £0.00 | 2 |
| Cashback CCs | £100.00 | £2,500.00 | 3 |
| Solar Panels | £566.05 | £14,151.25 | |
| Gifts | £235.00 | £5,875.00 | |
| Sold stuff | £194.05 | £4,851.25 | |
| Refunds | £0.00 | £0.00 | |
| Investment Income | £0.00 | £0.00 | 4 |
| TopCashback | £400.00 | £10,000.00 | 5 |
| Other | £318.92 | £7,973.00 | |
| Totals | 2028.34 | 50708.5 |
- As my figures only go up to October (10 months) I took the average monthly interest payment and multiplied it by 12 to get these figures.
- It was more than this but the Santander 123 account charges £2/month, going up to £5 soon, which cancels out any cashback so I’ll estimate this at zero.
- This was actually far more this year but it was because we built that up over the previous year. I therefore estimated £100/year as a guideline estimate which I think is about fair (£10,000 spending x 1%)
- This was a large positive but not including it in small income diversification, because, well, it’s just not that :p
- This was about £100 in cash so far, but I’m ramping this up by another £300 because you should easily be able to get that much more by doing the Tesco Clubcard hack and then converting them wisely into things you would have bought anyway and therefore reducing your overall spend.
If you want to see the spreadsheet with the original figures you can look at it here.
the tenets of personal finance hacking go a long way
As you can see from my lovely table, we can actually replace just over £50,000 in “proper” investments just by following a few basic tenets of financial engineering:
- Carrying a bit of money in a decent interest paying current account, or two (e.g. Santander and TSB). Most people probably do this anyway as their emergency fund.
- Running all purchases through cashback credit cards (and always paying the full balance off each month!)
- Running all purchases through a cashback website such as TopCashback* 1
- Asking for money for christmas and birthdays – OK it’s not for everyone that one 😀 but if you do, it all adds up (don’t spunk it on spurious “wants” though!)
- Selling your unwanted items on eBay/facebook/craigslist to reclaim some of their value back, rather than just taking it down to the dump.
- Obviously Solar Panels are a good idea if you can get them but they aren’t especially an “easy” day to day thing to do
- “Other” here for me turns out to be gambling this year, which I obviously wouldn’t recommend anyone do! But the point is that most people can think of something where they can earn an extra few hundred quid per year on.
Bottom line: If our spending was around £25,000 per year then that means I could quit work 2 years earlier than I had previously thought without taking these small income diversifications into account. Which is great! 🙂
(I guess technically there is two of us so it would only take 1 year off the early retirement schedule each, still, not to be sniffed at!)
Of course you could just use this as another safety net for the 4% rule because you may not think that it is bullet proof enough. This all depends on how comfortable you are with risk, and how flexible you can be in terms of earning a real crust again once you’ve kicked the cubicle farm job to the curb. (i.e. if the market tanks do you want to work in Asda stacking shelves to cover any short falls in your portfolio or not?).
That’s all up to the individual of course but the point remains that these small income boosts are not to be ignored either way!
conclusions
So there you have it, small habits do really add up quickly into larger benefits, it is the aggregation of marginal gains in action.
Small amounts of income do really add up quickly into big time savings, and the small figures are multiplied out into huge ones by the inverse of the 4% rule which is the 25x spending rule.
As I often do I’ll finish off with a few questions:
How much does your small income diversifications add up to?
And did you work out how much earlier you can retire because of it?
Any other quick wins to gain some extra income I’ve missed out here?
Let me know in the comments!
Notes:
- This page contains affiliate links, each one is brought to your attention with the ‘*’ denotation. What is an affiliate link you ask?! OK well it’s fairly basic… If you click on, sign up through or buy anything via these links I may receive a small fee, which will help to support theFIREstarter blog. The key thing is that it will not cost you anything extra to use these links, although don’t go clicking on them willy nilly just because it may help me! If you think you will find the product/service useful and do click through, then a sincere “thank you” for your support. ↩
Discussion (23) ¬
One of the key to income diversification is whether amount of time spent on earning small incomes eats away our time on our main source of income. If my main source of income is going to be compromised It may not matter more to me diversify my income but rather i would focus on improving my skills to generate that extra income from doing what i love most.
Hi Adnan,
A very good point! There is no point in toiling away on side gigs if it’s taking away time from your better paid main gig. I would say, a big “Unless” that side gig is something you are passionate about and can see it growing into something more lucrative in the future. If you are just messing about selling crap on eBay then, yea… it’s probably not worth it or very rewarding.
Cheers!
I agree with the sentiment of the article, maximising or even simply acknowledging different income streams, however marginal, is very useful. However to me something about this treatment doesn’t quite work for the income streams that are derived from capital.
Particularly the interest on cash accounts. I’m not sure you can hypothecate a ‘stash’ size from the interest given everyone would already be including the notional amount (from which the interest derives) in their stash. This means they are already seeing the benefit of the interest by applying the 4% SWR rate to the cash (so no shortening in time to retirement).
Solar panels raise a slightly different issue. Take the case of someone intending to purchase, the capital outlay would come out their stash (initial negative entry). Which leads to a choice : (A) take the install cost and retain it in stash value, generates its own SWR of 4% as per rest of pot, ie no net change to pot nor time to retirement OR (B) take the income generated and scale it up by 25x to give a stash value (as per your article above). Option (B), raises the problems I have ; imagine we weren’t talking Solar Panels but govvie bonds (or stocks) that pay 2, 4 or 6% interest and work out implications on stash size of doing this. Using (B) radically changes your stash (and time to retirement) simply through differing assest purchase choices. Arguably for Solar Panels you could / should do (B), especially in your case where there was no outlay. However in my mind choosing a nominal capital value and marking it in your stash would be more robust in light of how the SWR is built up from a theoretical diverse holding of assets. For every assest where this treatment is conservative (where IRR > 4%) there will be others that are aggressive (IRR is < 4%).
Hopefully the above makes sense, was just my initial reaction to seeing the article (having run into similar conundrums when messing with FIRE spreadsheets!).
Hi JamTomorrow,
Great comment! I did think of that when writing it but thought I’d keep the article simple and let people come to their own conclusions as you have done so here 🙂
Regarding the cash accounts, I think a lot of people probably do not include that in their “stash” because it is a spending float, the interest could be variable, it is an emergency fund, or any other number of reasons. I guess as you say you make the choice either include it in the stash size then ignore it for purposes above, or don’t but acknowledge that it is still producing income. I guess you are talking about people you may have 50 grand or more in cash like accounts, they would almost certainly include that in their stash size whereas I with a paltry ~10K would probably not.
It’s essentially two different sides of the same coin though, same as the Solar panels thing. I certainly do not include the value of the solar panels in my Net Worth or stash size and therefore I have gone with option B, and as you quite rightly point out especially as there was seemingly no outlay in our case (although I guess we paid a little bit more on the house for them, hard to judge/say!)
I think you’re right in choosing a nominal cap value is more robust actually… but also that there is no “right way” or “wrong way” as long as everyone is aware of what the alternatives methods mean.
Very good comment and lots to think about!
Thanks again
Nice idea. Every £10 earned passively outside of FI investments being worth £250 to me? It certainly makes looking after the pennies seem more attractive.
Credit card stoozing and current account switch offers would go into the table for me too.
And child benefit at £24000 off the FI fund, at least for a little while (18 years).
Hah… Good point on the child benefit SLG.. I’ll bet adding that to my charts next spring time 😉
I don’t do any stoozing at the moment but did just do a current account switch for £125, even one per year seems worth it when you multiply it out by 25 times ay?
Oh no, I’m gonna be the party pooper here again 😉
Absolutely agree that a sustainable passive income can reduce the size of the stash, and multiple small streams are better than one, because random variations and the central limit theorem mean the aggregate result will be more predictable and trend towards a normal distribution.
Let’s take a look at your list:
Interest and cashback on the top four – these are compensating for the fall in value of your capital (interest) and slightly reducing your spending (cashback). The interest might beat inflation at the moment, but this is not a stable income stream. Very little associated with cash is long-term sustainable enough to help you retire early.
Solar panels – the average Brit moves every seven years, and I hope you have knocked off the capital cost from the putative size of stash reduced, cos you had to find that (and it came out of your stash). OTOH there is something good about this because it hedges a cost that is likely to rise in real terms over the 25 year life of the bung you get from the Government, paid for by the rest of us…
Gifts, sold stuff – these are one-offs, not a reliable income stream. Arguably they should simple be credited to your Stash, you can’t multiply them by 25, you’re going to run out of crap to sell once you’ve mined the backlog and your gift-givers often like some reciprocality 🙂
Investment income – you are short-changing the capital appreciation (or the dividend income that is being added to the value of your acc units). Your Stash is being short-changed here!
Top cashback – you gotta spend so save with this, ’nuff said
Now if these were steady income streams coming in year on year, you would be right. But many of them don’t sound like it. To get TopCashback, you have to spend year on year. Of course it is a discount on your spending, and all to the good, but a steady income stream it isn’t. It may be a steady discount on your spending, but it is contingent on your spending, likewise the cashback from TSB and Santander.
The solar panels and your investment appreciation in capital are the two true sustainable income streams in there that aren’t contingent on spending IMO
Not necessarily true re: Cashback websites. I’ve earnt significant amounts in the past by switching my energy suppliers, changing my various insurance providers, , signing up for cashback credit cards, signing up for free credit report trials, gambling websites (as the cashback exceeded the required deposit). Of course if you just use them to get “4% off ralph lauren” then you have a point!
I agree. Gifts are not guaranteed – “the value of the gifts you give may not be equal to the gifts you receive, these values may go up as well as down” 🙂 If you do not understand this, i can offer further advice on this for a fee.
but you can budget for the gifts you give 🙂
Hi ermine,
Funnily enough had you in the back of my mind when I wrote some of this post as I remember on a few occasions you saying all this cashback stuff wasn’t worth the bother, whereas I am trying to show that if you add it all up it is certainly worth the bother.
I’m going to ignore the holes picked in all of the others as they were easy targets but I really don’t see the issue with cashback credit cards and websites?
Your argument that it is not a steady income is based on that you need a steady stream of spending to get the cashback… So what? I do have a steady stream of spending and so do most people, even frugal folks trying to get to FI.
Self-sufficiency is a nice pipe dream for many people but back here in the real world 99% of people will have a steady stream of stuff they need to pay for each year, most of which is available to purchase via credit cards and many of which is available with very nice amounts of cashback (switching insurance and energy suppliers each year are the obvious ones as Alistair points out above).
If your spending is that low that it is not worth your while with it then I salute you sir but for most of us, even frugal folks, it is perfectly easy to run up a 5K per person credit card spend a year, and get some decent cashback via the websites on top of that.
Why would you not want to get paid, or get a steady discount, however you want to look at it, for what you were gonna spend your money on anyway?
I know there are other arguments why you wouldn’t want to do it such as them having your information, but personally that sort of thing doesn’t bother me in the slightest. What are they gonna do with it, try to target me with ads or emails, so what? I can resist them or even better just unsubscribe! 😉
Cheers 🙂
I think I make about £120/year off the Santander card + account, so even when the monthly fee goes up, I’ll still be in profit. Am increasing my balance every month too, so more interest will be coming our way, slowly but surely.
About £250/year from index-linkers
About £500/year from dividends (selective reinvestment)
About £50/year from leftover P2P investments (am adding more again soon though)
About £200/year other
So £1000/year overall that’s a sweet £25k – 1 year off (just my) FI target date!
Yea we’ve decided to stick with it even though the cost is going up. It’s still a good deal and a great place to store up to 20K in liquid cash.
It’s nice to see all of that add up isn’t it? 🙂
That is certainly a good incentive for a side hustle. Thanks for inspiration.
George
Interesting post, TFS.
Whilst I do get some income derived outside of my main salary, the only thing I’ve included as a ‘cert’ in my FI/retirement plans is income from my rental property. The bits I’m getting at the moment from topcashback, sports betting and other online activities I don’t include as I don’t think I could count on me still earning them in the future.
Although with topcashback, I’ve earned over £1k in 4 years, so as long as the website keeps going, I could possibly include an average £250 income per annum. And contrary to what ermine says, I’ve earned the cashback from buying stuff that I need (eg insurance), or stuff that I was going to buy anyway (plane ticket, toiletries) or as Alistair mentions, flipping the gambling sign ons. You may be the most frugal person on the planet, but you still gotta spend/buy stuff so may as well buy via a cashback website!
I also hope to include investment/dividend income but it’s at less than £300 per annum at the moment, hopefully to increase to a lot more. The interest I get from P2P is around £120 pa, again, I hope to increase this too.
At the moment, I’m working through some spreadsheets as I’m revisiting my FI plan and need to adjust my investment strategy, to look more at income producing investments.
Hi weenie,
I agree that nothing is ever certain and things and offers may come and go but I think there will always be little side hustles about for people who can be bothered to do them.
I did my first sports betting matched bet in 2001 in the first year of University… and I am still able to do them now.
You would have thought I’d have expired all of the offers years ago but new sports books keep appearing and new offers on existing ones! And I think the same will happen with sites such as Top Cashback and so on.
Good luck with your dividend and P2P stuff, I think that’s a great way of earning passive income, and far more reliable than the stuff I’ve written about above obviously.
Cheers!
Until now,I saw only 2 sources of income in our family: my job and her job.
As I do not count the emergency fund yet into the fire fund, it is worth to see how much we make out of it.
In Belgium there are hardly cash back cards… Looks like a nice source if income
Another thought, as mentioned above: my main job keeps me that busy that it leaves little room for extra side hustles. I guess that us a choice: I go all in on the job and then all in with the wife and kids.
Hi ambertree,
Nothing wrong with the all in on the job approach if that is what floats your boat. You will likely reach full FIRE a lot quicker than I, who decided to mix it up a bit with various approaches to income and getting some free time back.
Cheers!
I’ve been thinking that a lesser used feature of boosting income is to try and get a discount on everything you buy. It’s not that we’re unaware of the opportunity in this area, as my weekly email from Martin Lewis attests to, it’s just I don’t practice enough of what he preaches! Off now to phone Virgin Media and threaten to leave for Sky, see what they’ll offer……
It’s a bit of a grey area but I guess you could look at that as income boosting!
Personally I would definitely try those strategies to reduce expenses but it would just go on the expense side of the ledger, and therefore reduce my “time to FI” that way. Two sides of the same coin really though.
Cheers!