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.

The Paradox of Replacement Income

Rise of the Entrepreneur

I do believe that Entrepreneurship is on the rise. There are far too many intelligent people working full time for companies. Soon these entrepreneurial types realize that they feel suffocated in the corporate world. They are full of ideas but poor in power and responsibilities to influence large companies in a meaningful way. They begin to seek an outlet for their creative energies, they desire to be more and have more. They focus on results rather than politics and seniority.

We are those people. And if you are reading this, you are probably one of us.

So it goes without saying that we have pseudonyms or "pen names" when we write. No need to explain - you get it.

So here's the problem, entrepreneurship is on the rise, but we are still viewed as "odd balls." Viewed as people who just can't be happy with "the way things are" - the status quo. But it wasn't always like this. Let's review.

Most people today work in the corporate world. We go to work everyday - working for someone else ("the man"). But this is a carry over from the industrial age. A time when people were mere cogs in the industrial revolution. A time when workers clocked in and clocked out, happy to receive a steady pay for steady work. But the problem with this era was that people became lazy. They no longer wanted to think for themselves. Just show up at work, do what you are told, and collect your check. After years and years of this you will have seniority over the newer generation and you can tell them how "things have always been done here."

But before the industrial age, almost everyone was an entrepreneur! And by that I mean they owned their own business, had to manage their own marketing, supply, everything. People back then were blacksmiths, coopers, farmers, bakers. Then mass production came along and no longer where people blacksmithing their own tools, they now worked on the assembly line for craftsman. I am exaggerating but you get the point. Soon the mom and pop shops were taken over by corporations who mass produced everything. Voila! The industrial age.

Another terrible hangover from the industrial age is management. Suddenly mass labor required organization which gave rise to a highly esteemed position of manager (typically someone with seniority!). The problem with managers is that very often they have no wealth creation skills of their own, or they have forgotten them. These are people who rely on the corporate world for their strength and power and get work done through others.

Then came along the rise of the information age. Suddenly anyone with a computer can own a business. The barriers to enter the business world on your own decreased exponentially. No longer did you need large sums of money to buy equipment or employee assembly line workers. Suddenly the processing power of computers on the internet gave the individual power again.

So here we are. In the era of Bill Gates, Steve Jobs, and Michael Dell. All of whom literally started businesses out of their own garages. What's the point of this whole blog? Well times - they are a changing, and the more you hold on to working the status quo - the further behind you are! Don't believe me? (and why should you we don't know each other and I am using a fake name to disguise my identity from my "day job"). Below is a chart I took from the Tax Foundation's 2006 report: "Putting a Face on Tax Returns".



As you can see today, the wealthiest people in America tend to be those who own their own business. Isn't it time you start yours?

Rise of the Entrepreneur

The Death of the 401k Match?

Working for a large corporation has always been seen as a safe, stable form of employment. This faith in safe jobs is being tested in this economic downturn as we have seen layoffs of corporate jobs to save company profits.
Lost in the news of a recession, layoffs, and bailouts is the news that may have the most long term impact on you and your family. Large companies like Motorola, Starbucks, FedEx, and Kodak have started to cut or eliminate contributions to employee 401k programs.
With this and the social security crisis, you may have to become responsible to fund 100% of your entire retirement. This means everyone must run their households like small businesses to ensure that they have enough profits at the end of the month to save for retirement before they are physically unable to work.

A brief history of retirement:

Pensions (Peaked in the 70's and 80's):
If you worked your career for a company you could retire with a lump sum or annual payment in the form of a pension. This combined with a healthy social security could support 100% of your retirement needs.

401k Matching (Peaked in the 80's and 90's):
To save money, companies did away with pensions and offered a 401k match. Generally this meant the company would contribute up to 33% of your 401k retirement.

On your own (2010 and beyond?):
Without any company matching and social security at risk, it may be up to everyone to find the money at the end of the month to save for retirement in the face of rising taxes to help offset our national debt.

Is your company providing you enough for you to save for retirement? Even if you do not wish to leave your job and work for yourself, could becoming a Corporatepreneur help you fund your retirement and future dreams?

We do not advocate over sized entitlements like free retirement. But, we do think it is important for people to adjust from a world where you could get help in saving for your retirement, to a world where you are on your own.

Just because you have to do it on your own, does not mean you have to do it alone.

The Death of the 401k Match?

5 Secrets to Success, Wealth, and Happiness

One man's road to Success, wealth and happiness was created by studying the Book of Proverbs, the proverbs of King Solomon (who knew). Anyways instead of a book review (I'll skip the part about how this guy makes his millions) I thought I'd save you some time and give you the gist of the book.

So here are the 5 Secrets to Success, Wealth, and Happiness. I have expanded upon the 1st two in detail because they really stuck out to me.

"Secret" #1 - Be Diligent
This Author states that it is pretty much human nature to take the path of least resistance, to do the minimum, and to just get by. He argues that in order for people to aspire to be more, all the success, wealth and happiness in the world is reserved as a reward for being diligent versus lazy.

He states that being diligent is to be:
a) Persistent towards your goal or in refining your craft (not in a stubborn way but with an openness to continuing to alter your course when needed to overcome obstacles).
b) Hard working
c) Well planned
d) Perform with speed, efficiency, and excellence so you will be sought out for your work.

The rewards of this diligence are:
i) True fulfillment without the want or need of material possessions
ii) Respect and admiration from society for your work
iii) Satisfaction and success
iv) Great wealth (everyone is happy to pay someone who does great work)

The author states that pretty much by being lazy you can assure yourself of having the opposite of each of the things above.

Most interesting was his beliefs around the root causes of laziness:
1) Self-centeredness - those who are open see the world around them will find an abundance of opportunity to make a difference with their own unique skills
2) Conceit or arrogance - those who are humble will be open to learn much from the world around them. Those who are arrogant know it all already and continue to takes the actions they want to take without improvement in approach or aspiration.
3) Ignorance and Irresponsibility (Foolishness) - The ignorant act without regard to the consequence of their actions. It is easier to be ignorant than to be educated because it takes time and effort to become something.

I won't be able to comment in as much detail as I would like on each of these without losing some readers, but this is one of two that I will comment on. At times I think you can go through the motions and do just enough to get by in this world because you haven't spent the time or the soul-searching effort to decide what you want to do. If you are going to do or study something, do it as best you can. If you are half-assing it - then you probably don't know what you want to do (or you may know it's not to become that which you are studying to become) so do something else.

"Secret" #2 - Eliminate Your Sense of Entitlement
A sense of Entitlement in any area of your life is an enemy that will keep you bound to unhappiness. This author argues that you will continuously be looking to others with unrealistic expectations and no control over what they actually are willing to give you. The only way to break loose of this unhappy and bitter cycle of entitlement is to release all unrealistic expectations you may have of others, including the government, your spouse, your employer, friends and your relatives.

This is the other topic I feel compelled to comment on. After spending 2 years studying Gen-Y (also known as generation debt) I have talked with many teenagers and people in their early twenties and I have seen this first hand. I am not sure what compels people to constantly keep score of what others owe them without thinking about what they have contributed in order to justify their "ransom". And too often you will find that the people who feel they are entitled to something are those who are desperate for that hand-out because they do not give enough of themselves to earn it. Once these people figure out how to earn what it is they desire (money, respect, etc) they will quickly break free of the chains of relying on others as they figure out how to rely on themselves.

In a business context the story goes as follows. Most people don't know how to make money. They don't know what they should do to have someone offer them compensation, so they look to an employer to tell them what to to to generate money for the company, and the company gladly gives them a wage which will be less than their output for the company. One famous business quote is that all of the enormous profits of the Fortune 500 companies are from excess output of the employees that they are not being paid fairly for. Once you learn how to earn money (or create money) without needing a company to tell you what to do, you will have "job security" for the rest of your life because you will always be able to rely an yourself versus needing a job from someone else.

But quickly back to the Gen-Yers. The sense of entitlement is alive and well as many people just starting out and working full time believe their standard of living should be as high as is was when living at home with mom and dad. They forget that it took their parents 20+ years to get to that level in their lives. This is a rude awakening for many Gen-Yers and a big reason why they prefer to live at home with their parents until they can save up for a higher starting standard of living. I still support Gen-Yers who chose to live at home with their parents because I think it is more responsible than starting out buying a home or a new car too soon while living lavishly. Far too many Gen-Yers start out with enormous college debt to let alone then add to their debt by spending beyond their means with no thoughts of saving for the future or retirement.

This section really struck me as I feel our nation becoming more of an entitlement nation than a boot-strapping nation of hard-working achievers which I believe is what built this nation.

"Secret" #3 - Be Grateful
If you are not grateful, DEVELOP a grateful heart. We all start with different levels of difficult situations in our lives, so this Author recommends if you currently don't feel that grateful, "treasure hunt" for things in your life that you could be grateful for already. In addition to warming you heart and those around you, you will begin to see joy in your life that is consistent, persistent, and lasting.

"Secret" #4 - Root out the weeds of Envy
Envy is a bottomless pit with no end. It is in opposition to feeling fulfilled. Envy is a misbelief that the things others have makes them happy or would make you happy. I think research has shown that by achieving a new level of possessions, we quickly recalibrate and would then desire what's next. When you know what you want in life, you can then know when enough is enough for you. Until you do that soul-searching, you will envy out of fear because you don't know enough about yourself to measure when you will have enough and be fulfilled.

"Secret" #5 - Live Wisely
The author states that Wisdom is not just about knowing what is right but acting on it. Living wisely involves DOING the right things, for yourself and for other around you. It is not enough to say "I know I should appreciate the people in my life" if you are actually being cold or bitter. It is an emptiness inside that fosters an external chill. Probably everyone knows someone who is curt or rude, and I also believe most people know that those people aren't happy with themselves more than they are unhappy with the masses they aim to irritate. Wisdom is about continual learning and self-improvement, and then putting those learnings into action. My takeaway from this point is not to just talk the talk but walk the walk. Another point that comes to mind with the live wisely point is that inner peace is not enough. I think everyone must then work to spread that peace.

So that's my long-winded summary. If you made it to the end congratulations. By no means do I pretend to be an expert on any of this, but I can now say that this book has brought it more top of mind as something I strive to be conscious of. And now - hopefully you will too because then in some small and indirect way maybe I can pass along some success, wealth and happiness to your life. That is your reward for being diligent enough to finish this blog!

5 Secrets to Success, Wealth, and Happiness