Salary Growth vs Earnings Growth, or Why the Wealthy are Entrepreneurs

Several years ago, I discovered that you could buy small businesses from their founders at a reasonable price. The size and nature of many of these companies make them very attractive as “lifestyle businesses”, or businesses that require part-time effort to operate and can yield good-to-high income for the owner’s living expenses.

Why is it that businesses are so much more powerful as cash generators than a “job”? One thought is that you can potentially disconnect your income from your time spent. But today I realized something else:

Its easier to grow earnings for a small business 10-15% year over year than it is to grow “day job” salary at the same rate, over the same time frame.

In my fortunate career, I’ve managed to grow my salary at 9% per year for almost the past decade, which is great. But I don’t know how long I can keep this up before I hit a “salary cap” in my field, or have to move to Silicon Valley to continue growing my income.

Now, I would be remiss to not acknowledge that many small businesses never make it to this stage; they’re but an extension of their owner (e.g., service based businesses) and lack time leverage as the owners are still trading time for dollars.

But a skilled operator in the right business is quite capable of growing a small business at a double digit rate for most of a career. (Sanity check: if you start out at a typical $60k/yr, a median household income, and grow at 15% for 10 years, 12% for 10 years, and 10% for the next 10 years, you’d be doing just shy of $2M per year at “retirement” after 30 years. That’s very achievable by many “dull-normal” Millionaire Next Door businesses. And that business could be worth between $4M and $12M if you decide to sell it then. Wee!)

This is a very different approach than the venture-capital fueled “grow at all costs” mentality that’s currently in-vogue. Fortunately, this mindset is starting to gain traction in communities like IndieHackers and MicroConf.

And this approach may be just right for your own life.