Handling Extra Income When Pursuing Financial Independence

The funny thing about increasing your income in a household that’s pursuing Financial Independence is that it works so differently than other households.

If you start a side hustle that earns an extra $500/month, normally you may think “I’m already hitting my savings goals, so I’m free to spend this ‘bonus’ money however I please!” However, because you’re aiming for FI within a certain timeframe, you have to think about the relationship between saving and spending.

Basically, they play out like this:

• you can spend it all.

• you can save it all.

• you can spend some portion of it.

Spend 100%:

• if you spend 100% of the extra (after tax), you’re

  • increasing the absolute amount you have to save for FI.

  • increasing the time to reach FI because you now have a lower savings rate

  • ex: if you earn and spend an extra $500/month ($6000/year), you have to save an extra $150k to hit FI.

Save 100%:

• if you save 100% of the extra, you’re

  • decreasing the time to reach FI because you increased your savings rate

Maintain Savings Rate:

• if you maintain your current savings rate,

  • you’ll hit FI in the same amount of time, but you’ll be building a larger nest egg to support it.

  • ex: if you’re currently saving 50% of your income (which would allow you to hit FI in 15 years starting from $0 net worth), you’d save $250/mo of your extra $500/mo.