Modifying your FIRE Engine Pt 1 – Adding Power

So, if you’ve read building your fire engine and have already automated your savings and investments every month, which means you’ve build FIRE Engine 1.0. Congratulations!

But you shouldn’t stop there. If you’re investing at least 25% of your income in broad index funds, likelihood is you’ll reach financial independence in maybe 30 years or so. That’s a hell of a lot better than never reaching that point, but it’s also a very long time to sit twiddling your thumbs and growing old. Which is why we have to take the engine into your garage and make some modifications, to “pimp my ride” .
The more money you can feed in regularly to the engine (your investment pot), the faster the pot will grow thanks to the magic of compound interest. The end result is that the path to financial independence is shorter (or at least you’re travelling towards it faster), meaning less time to FIRE and more time afterwards to enjoy the newfound independence!
In this post, I’m going to discuss some of the main areas in which people have been able to increase their income in order to supercharge their FIRE Engines.

Passive vs. Active income

Income comes in many forms, and in trying to pick up on the road to financial independence it pays to have more than one source of money coming in. Traditional income in the form of a salary is tied intrinsically to the number of hours you put in, which causes a problem. Each person only has a certain number of hours to offer, and while of course you could increase your working week from 40 to 80 hours a week, you’re liable to run yourself into the ground before you see any of the benefits of the extra income.
So, the key is to either increase the amount you get paid for your time, or to generate income sources that aren’t tied to the number of hours you put into them. This, commonly known as passive income, mean you can keep earning money while you’re doing more important things, like sleeping, enjoying the fresh air or spending time with family and friends! Now that is truly awesome! Because, it not only means you can achieve financial independence faster, but you can continue to earn and accumulate if and when you choose to leave the rat race.
So, lets take a look at some of the most common ways people earn active and passive income.

Passive income

  • Rental income – this can either be purchasing a property to let out, or letting out spare rooms in your own home. I let out a room to a friend and cover around half of my mortgage and bills this way. In the UK, the government Rent a Room Scheme lets you earn up to £7,500 a year tax free from letting out furnished accommodation in your own home.
  • Ebook sales – it’s easier than ever nowadays to get your own book published online on Amazon. That doesn’t mean it’s easy money, there are millions of ebooks for Kindle on Amazon now (many of dubious quality) so it’s important to write quality content. This is an upfront time commitment, but once the book is written and published, it doesn’t necessarily need any further input from you (though some ongoing promotion will help to maximise your returns). I did this a bit when I was younger and made a small amount of money, and will consider it again in the future.
  • Investments – this is too huge a topic to go through in a bullet point. But by buying index funds you’re owning a snapshot of a particular market, and the fees are minuscule compared to actively managed funds (who also underperform compared to index funds 80% of the time). In the UK you can invest up to £20,000 per year into a Stocks and Shares ISA and will be tax free forever, which is why it’s the backbone of my FIRE Engine.
  • Dividends – related to the above, some people choose stocks or funds that have a strong history of regular dividend payments. That means you could count the dividends as income while leaving the stock untouched to (hopefully) continue to increase in value and pay more dividends. I currently have all dividends automatically reinvested to buy greater portions of my index funds.
  • Peer to Peer (P2P) lending – this involves individuals lending their money to individuals or businesses for medium term loans, in return for interest payments. However, like with any loan there’s a chance the other party may not pay back, and different P2P lenders handle this differently. Your money can be spread out across many different loans to reduce your risk exposure.

Active income

  • Salary – for most people, this is the single biggest (if not only) source of income. Most spend 40+ hours a week working for it, but all too often spend little or no time trying to increase your salary. Take time each week to learn new skills that will improve your work, and once you’ve put them into practice ask to be fairly compensated for the added value you provide. If that doesn’t work, or there’s no more progression in your job, it might be time to start looking elsewhere for work.
  • Consulting/Freelance – If you have a particular skill set, whether related to your primary employment or not, look to see if you can monetise this for an hourly rate, which you may find ends up being significantly more than the hourly rate from your main job!
  • Side hustle – I debated whether to put this point in active or passive, as the various common hustles have different amount of ongoing input required. Because most aren’t fully passive I’ll list them here, but these do tend to require ongoing effort, even if the income isn’t directly associated with the time investment.
    • Blog – lots of upfront effort writing posts, building up a social media presence and maintenance, but once monetised (e.g. via associate links, advertising) the posts stay up 24/7 and you can theoretically make money round the clock without you being sat in front of a computer.
    • Online selling (e.g. Fulfilled by Amazon) – many people now are selling products online via Amazon, where they buy products in bulk and have them sent to one of Amazon’s warehouses, list them online and when each sale happens, Amazon dispatches the product on your behalf. You pay fees for storage and shipping, and some people have made significant amounts doing this.

Where do I start?

Multiple streams of passive income aren’t built overnight. You should start by making the most of your primary income source, as achieving a bump up in salary can give instant and lasting results compared to passive income, which sakes a while to build up. But once you’ve done that, you should absolutely be looking to generate alternate streams of income, however you choose to do it.
It’s worth tackling one income source at a time. Side hustles often need a lot of attention, particularly at the beginning, to ensure they grow and can provide you with reliable income. Once up and running, they can become the supercharger in your FIRE Engine!
I’d love to hear about the income sources you’re employing on the road to financial independence. Leave a comment or tweet @thefireeng.
If you liked this, then you should check out Modifying your FIRE Engine Pt 1 – Adding Power!
TFE