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Thursday, February 19, 2009

The Paradox of Replacement Income

What is one of the first things you said when you started thinking about starting your own business? I am going to guess one of them was along the lines of "if only I could make as much money as I do in my [insert boring corporate job title] by starting my own business - I'd quit this [insert boring corporate job title] today!"

This theme is quite common and quite understandable. And hey - if you could instantly replace your corporate income by working for yourself and doing something you love - who wouldn't?

But - as you probably know by now - there are no "get rich quick" co-outs here on the Corporatepreneur Blog. And making money in your own business takes time. We know - we are 8 years into the Corporatepreneur world and it took us 6 years of running our own business before our business generated enough income to match that of our full-time corporate jobs. But then what? Did we quit working in the corporate world and start living the high life? No. And here's the surprising tale of how it may be likely that you would make the same decision to stay at your corporate job too.

Let's assume that you are planning to start your business in 2010. And just for conversation, let's say you are making $50,000 in your day job and get a 4% raise per year. Below is a graph depicting a 10 year time horizon for your side business income to become equal to that of your corporate job (at that time).

Not too bad right? In 10 years time you have made a substantial amount of money from your side business and it now equals your corporate income.

I first want to assure you that such a scenario is possible - I don't think it is an exaggerated "get rich quick" scenario but I do think it is a life changing situation not only financially but emotionally and in many ways spiritually (but that is for another blog).

So what's the problem? Well - in this hypothetical example - you now make enough money working for yourself that you could replace your corporate income and quit your full-time job for that crappy boss. Well - not so fast! Because this is a gradual process (it's really not because look how much faster your business income grew compared to a fair market salary increase in the corporate world - but that's what entrepreneurship is all about) - and it take 10 years for your incomes to be equal - you have now grown accustom to a lifestyle of making 1.5-2.0 times your corporate income alone. Maybe you have bought a new car or your wife has decided to stay home with the children as a result of this new side business windfall. Or maybe you have become an avid saver for retirement.

Whatever the reason - my caution is this - when you start out wishing you could just replace your corporate income with a side business you may find out that there really isn't a good time to take a 50% pay cut (reduce your income by half).

And this my friends - is one of the awkward stages of being a Corporatepreneur that this blog is all about. These are real life situations that anyone of us would love to have as a "problem" when we start out - but become a real challenge years into starting your own business.

I have been excited to write this blog because when it happened to me it took me by surprise - did it surprise you? Let us know by posting a comment.

PS - The income scenario above has been watered down. Below is a more "realistic" example of how your income might grow in a side business over 10 years. As you can see in the entrepreneurial world the financial gains can be as big as the variability. Entrepreneurs are not on a "pay scale" and often the growth of your business is unpredictable. It doesn't follow a nice curve! In fact - there is no guarantee that you will make the same amount year to year - making the leap to working for yourself full-time a challenge.


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