I’ve had gigs that pay $500 per month. Let’s have a look at what that’s worth.
What is $500 per month worth over a decade?
- 10 years, 12 months a year, $500 per month => $60,000
- That’s straight math, no implied additional costs/benefits.
What if I swept the cash from my side gig into a Target Date Fund?
I estimate a 60/40 portfolio returned ~9.7% per annum across the last decade.
- 10 years, 9.7% a year, $6,000 per annum => $94,250
- So if I’d invested that money, each month, for a decade, I’d be getting close to $100K
10-15 clients at $500 per month, less a bit of overhead => close to $1M in a decade.
Flipping this example: my condo association charges me an extra $500 per month.
What kind of headwind does that put on my real estate investment?
- We have an example from above, $94,250 per decade. $94,250 is an estimate of the cost to my balance sheet of sending money to the condo association, rather than a 60/40 portfolio.
- However, there’s one more step because we pay expenses from after tax income.
- Do you know your average tax rate? I use 25%.
- $94,250 / (1 – 0.25) => $125,000 // this is called grossing-up your answer – to pay $500 per month, I need to earn $667
- So a charge of $500 per month could drag your return down by $125,000 a decade.
Recap of the three ways:
Nominal => $500 per month is $6,000 a year is $60,000 a decade
Opportunity Cost => $6,000 a year not invested implies $94,250 in a decade if the assets earn 9.7%
Grossed Up Opportunity Cost => $6,000 not spent, and invested pretax (retirement account), has an opportunity cost of $125,000 in a decade
The exact numbers are not important. What matters is understanding the concept… repeating amounts become big money over time.
$500 per month is going to cost the family between $60,000 and $125,000 a decade.
Expenses avoided, small gigs (earned then invested), and holding costs… these can have surprisingly large impacts on your financial life.
Seemingly small gigs are worth more than they appear…
- if they come with health insurance (my unsolved family budget line item)
- if they come with discounted prices on goods you are already buying (part time work at a business you’re already spending with)
- if you make a habit of sweeping the income into a Target Date Fund (side gig cash invested to benefit my future self)
Something I like to do in my financial life is look at the line items in my family budget and ask… “What’s it going to take to eliminate that cost?”
If I can’t eliminate then, “What work might I enjoy to mitigate the cost?”
The game being to get my net cash burn to zero, while sustaining a life with meaning.
Enjoy 2021 – there remains a lot we can do, while remaining smart to mitigate COVID.