To become financially free, you will use a combination of reducing your expenses, improving your investment returns and increasing your income.
First, the good news: theoretically, the amount you can increase your income by is uncapped. There is no limit. Just look at Jeff Bezos if you don’t believe me. He added $10 billion to his net worth in a single day.
Because you will always have expenses, there is a limit to how much you can reduce your spending. And investment returns are limited by how much the market can withstand.
Now, the less good news: increasing your income takes effort.
There are several ways to increase your income.
- Increase the salary from your job.
- Develop a side-hustle.
- Become your own business owner.
You can also make more money from your investment returns, but we’ll leave that to a separate discussion. Income is by definition active here – where you are putting in your time, energy and skills in exchange for payment.
If the income you are earning is passive, then for the purposes of the Financial Independence equation, it is part of improving your investment returns.
How to increase the salary from your job
If you want to earn more money, you have to take action. Nobody is going to force you to ask for more money, nobody is going to force you to train up to make you more bankable. You alone will drive the actions to increase your pay.
But it’s important to recognise that you are putting in a huge amount of effort and time for your employer. There is no shame in wanting to be fairly rewarded.
Most work divides between an annual agreed payment – called a salary or a wage, and payment if certain targets are met – called a bonus. There are also often fringe benefits at work – perks – which can have financial value
Whilst in a particular job, you should be looking to maximise the net asset benefit you get from your mix of salaries, bonuses and perks.
What are examples of how to maximise the return from your job?
Your net assets increase every time you have an inward cash flow that you do not have to pay back. So, you want to increase the inward cash flows to you from your employer.
- Get a real pay rise.
- Annual salary increases are often not much different to inflation, so an ordinary pay rise may actually not make you better off.
- Promotions to new roles normally come with a real increase in pay. Negotiate hard if you seek or are offered a promotion.
- Benchmark against the market – if you are being paid less than similar roles at other companies ask why.
- Negotiate with your boss in current role. Set objectives with your boss and try to get commitment to a pay review if you meet or exceed those objectives.
- Check for discrimination – in many companies, certain groups may be paid less from discrimination. If you are concerned, you should raise with your manager that you want to be sure you are paid fairly against other colleagues. Note – I’m not encouraging you to abuse these hard won rights.
- Get a higher bonus.
- Incentives schemes – Some bonuses are based directly on performance, for example the number of sales you’ve achieved in a month. It goes without saying if you are in this kind of job you should be looking for every legal route possible to maximise your incentive.
- Discretionary bonuses are paid by management based on the judgement of your performance. Be sure to have clear expectations and targets agreed with your line manager at the beginning of the year, and track against these during the year, so you can be confident of achieving a full bonus. Ideally, you want to set objectives that you can comfortably achieve provided your manager agrees with this, and overdeliver.
- Watch out if your line manager changes during the year. Usually it is your new manager who will decide on any bonuses you receive, so make sure that they know how great you are.
- Discounted company shares
- Many big companies, and some small, allow employees to buy their shares at a discounted rate to the market. Often these schemes are structured so there is many big companies, and some small, allow employees to buy their shares at a discounted rate to the market. Often these schemes are structured so there is little risk to the employee risk to the employee, because at the end of the scheme you can always choose to take your cashback rather than buy the shares. In essence, this is like saving in a bank account, with the opportunity to take a large gain from the discount the company has offered you plus any increase in the company shares during this game period.
- Pension matching
- If your employer offers to contribute extra money to your pension, either by matching the amount you put in or simply topping up your pension, take it! This pay immediately increases your net assets. It is similar to a pay rise, except you normally cannot access the money for a number of years. During those years the money will be invested, will grow, and you won’t be tempted to spend it.
- Overtime pay
- Overtime is normally paid at your basic hourly rate or more. That means if you put in 10% overtime, over the course of a year it is equivalent to a 10% pay increase.
- Some companies do not pay overtime. Is there a way to increase your base pay to compensate if you find you often work extra hours, or at least get additional vacation in return.
- Sacrifice vacation for pay
- Some companies allow you to sell your vacation time in exchange for additional salary. Giving up a week salary is similar to getting a 2% pay rise. Be sure to weigh this up against your quality of life from having less holiday.
- Golden hellos
- To entice you to join a company some will offer a golden hello. There is no harm in asking if there’s any upfront payment in joining a company after you’ve had your offer
- Redundancy and termination pay
- When you are leaving the company it can be possible to negotiate payment for redundancy or termination. The idea is that this compensate you for looking for other work. If you don’t need to spend that money, it increases your net assets.
- Car allowance
- Many companies pay a car allowance. Consider whether you need to spend the full allowance on a car, or whether you could get a cheaper car or even a cheaper or free mode of transport like walking or cycling. All remaining money can be added to your net assets.
There are also many non-cash benefits that companies offer that you can either use to offset a cost that would otherwise decrease your net assets, or get more for free. Note – every company has different policies so you need to understand what is encouraged at your company
Here’s a list of possible non-cash benefits your can receive.
- Subsidised canteen
- Many companies allow you to eat cheaper than the High Street through their own canteen. Some even let you get breakfast and evening meal is too.
- Subsidised travel
- You may be able to access discounted travel cards for buses or trains from your employer.
- Subsidised loans
- Companies often have spare cash and want their employees to be successful. They can afford to offer lower than market rate loans. Paragraph note, be very cautious about taking any lines even if they look cheap.
- Depending on the country you live in, free healthcare can be an enormous benefit. Particularly in the USA, because the personal expense relating to this is so high. For some people, it’s worth having a job just for the health care.
- Glasses and eye tests
- All that hard work can cause eyestrain. Many companies will allow you to take free eye test and even give you free glasses if you need them
- Most companies love to have a fully trained workforce. You may be able to get free or discounted training relevant to your job. For certain jobs, particularly straight out of university, the company will pay for your full training, for example to become a chartered accountant, in exchange for a commitment to work with them for a period of time.You also may be able to access time off from work in order to complete this training. Some companies will even find you to train on any subject.
- Companies products
- Many companies allow employees to have free or discounted versions of the products they sell. This makes sense for the employer because they want their employees to love the products and it’s also cheaper for them because it’s only a marginal cost price. Should you choose your employer based on an industry where you already spend a lot of money? For example, if you have a handbag addiction, should you work for Mulberry?
- Company events
- like social and networking events, free access to museums, galleries etc.
- Free phone calls
- Free mobile phone
- Free laptop
- Free home office set up
- Free printing
Once you have tried every angle to maximise you current employers pay and benefits, the next thing to consider is to look for another job.
What are the reasons to look for another job?
- Increases bargaining power within your existing company
- Learn whether you are being paid the market wage for your skills
- Find a job with better pay or benefits
- Find a job with better work-life balance
- Find a job you enjoy more.
To get a substantial pay increase, you either need to get a big promotion in your current employment or you need another employer to offer you the pay rise.
What about tax? Think of tax as an expense of work. So you should approach it like any other expense, it falls in the high volume/high frequency category – tax is an addiction!
Why you should develop a side-hustle
Income doesn’t have to be limited to one source. You can build multiple streams of income.
There are a raft of different ways to earn a little money on the side. Some of these require your time and effort, others are more about your skills and resources.
You earn more income, potentially find a route to a full time career and become a more rounded individual. You acquire different skills from your day job, meet different people and develop in different ways. More people should take on a side hustle for love or money or, preferably, both.
Types of side hustle
Here’s a list of some of the possible side hustles out there. Different ways people have found to make money outside of their day job. It’s by no means definitive, and no, I’ve not tried all of these so this is not a recommendation. Just ideas to get you started.
- Become a driver – Uber or Lyft
- Walk people’s dogs – Wag
- Do voice-overs – Voices
- Become a tutor – Tutor
- Read people’s books – become a beta reader – Fiverr
- Help people practice their English – Fiverr
- Launch a website blog – Bluehost
- Open an online store – Shopify
- Become an influencer – Instagram or TikTok
- Design and sell your own products – Etsy
- Buy low-priced goods and sell high – Ebay
- Publish a book – Amazon
Whatever you decide to do, don’t go in it with huge ambitions. Find what you find interesting and enjoy and then build on that.
Become your own business owner
Whilst your side-hustle may bring you some income, to generate big money, with big effort, big risk and big potential rewards.
Creating your own business isn’t just about income either. A successful business creates value which increases your net assets.
And you don’t necessarily need a lot of money upfront to start your own business.
Alan Donegan’s Pop Up Business School teaches you how to start your own business with very little or no seed capital.
Reflection on increasing your income
I started this section by saying that increasing your income meant doing work. And that work can often be work you don’t enjoy, possibly for years at a time.
The goal of reaching financial independence is all very well, but if you are unhappy, stressed, burnt-out or depressed by work, is it worth it?
If you live to work, your earning enough money to chase financial freedom, but not so you can give up your job. Finance freedom offers a lot more that just retiring early.
If you’ve sold your soul for a paycheck, pursuing financial freedom is urgent. You’ve got the money, you’ve got the motivation. So get on with it.
If you love your job but are paid a pittance, then you’re a martyr. You deserve to get paid more. Are there options to do the work you love in a more lucrative industry? Or are you happy to live the life of a monk?
If you hate your job and aren’t getting paid much, then you must take action. You aren’t going to become financially free any time soon. What other paths could you take that pay more? Get retraining, get studying, don’t settle for misery.
It’s important to remind yourself that it is only one component of Financial Independence. In reality, you do not have to increase your income to become financially independent, if you are able to influence you saving rate, safe withdrawal rate or increase your net assets some other way. But, for most people, increasing your income is likely to have a material bearing on achieving financial independence. Every pound earned and not spent is one more pound towards your net assets.
- Increasing your income will bring you faster to financial freedom.
- Take action to increase your income. Nobody wants to pay you more.
- Decide if you’re in the right job – one that you love or that pays you well.
- Start a side hustle.
You are now ready to improve your investment returns.