A few years back a colleague and I would regularly discuss business and investment ideas.
One thing he was really interested in was real estate investing. He wanted to own a bunch of properties and rent them out, and perhaps build some sweat equity by purchasing properties that needed some TLC.
Here’s the thing: renting out properties isn’t necessarily the difficult part (though I understand the effort involved from my experience renting out an apartment the past seven years). The difficult part is having the cash to invest.
In a similar way, everyone would love to have a decent amount of dividend income. But the tough part is actually getting your hands on the cash to invest in the stock market.
The prospect of living entirely – or even partially – off dividend income can be motivating. That motivation can be used to find more cash to invest, which speeds up financial independence, regardless of whether that is from dividend income or more broadly from building up your stock portfolio.
Before we dive in, though, here are a few things to keep in mind:
- Emergency Fund – One of the pillars of a solid financial foundation is an emergency fund. Having 3-6 months of expenses socked away in cash can put your mind at ease and helps avoid credit card debt. Be sure you have an emergency fund before investing.
- High Interest Debt – We’ll get into the “invest versus pay off debt” debate later, but one thing that is a no-brainer is high interest debt. Debt that is in the double digits, which is typical with credit card debt, should be paid off prior to investing more money in the stock market.
- Understand Your Cash Flow – This post truly is focused on increasing cash flow. With that in mind, it’s obviously important to understand what your cash flow is. If you don’t already calculate your income and expenses I recommend using Tiller to pull data from all your financial accounts.
Let’s dive into the different ways to find – and create – additional cash flow that can be diverted towards investing in the stock market.
1) Lower Recurring Expenses
Lower recurring expenses is a fancy, if not more specific, way of saying spend less money. Recurring expenses include things like subscriptions, housing costs, car loans, cell phone bills, groceries, and so on. The reason I think it’s worthwhile to focus on recurring expenses is because you get the savings month after month after month.
Let’s use cable as an example. I recognize many have already cut cable out of their expenses, but it’s still a good example to illustrate the value of focusing on recurring expenses (plus there is still more than 70 million who haven’t cut cable!). If you can cut out a $100 a month cable bill and replace it with a $25 Sling TV subscription with a digital antenna, you would have an additional $75 of cash flow each month. That’s an extra $75 that you can divert towards building your investments.
As I mention in my book Student Loan Solution, there are a variety of categories you can focus on cutting back on. As a general practice, you should go through each spend category one-by-one and see if there are any opportunities to cut spending. This is exactly how businesses go about cost cutting, and it can work just as well for your personal finances.
2) Lower the Interest Rate on your Debt
I want to specifically call out interest rate on debt because of what a big impact it can have. Someone with a car loan at 1.0% is paying significantly less over the life of their loan than someone with the same care loan at 6.0%. The same logic can be applied to any debt, including a mortgage, credit card, or student loans.
Student loans are a bit unique in the sense that you may want to keep higher-interest federal loans than refinance at a lower interest rate with a private company (I go into detail here on whether you should or shouldn’t refinance student loans), but other debt is more straightforward. If you have credit card debt you are working on paying down, it may make sense to shift the debt to a credit card offering a 0% APR balance transfer (the 0% APR period typically lasts 12-18 months). It also may make sense to look into refinancing credit card debt into a lower-interest personal loan.
Since this post is about finding cash to invest, inevitably the pay down debt or invest debate will come up. I tackled this in Student Loan Solution, where Erin Lowry of Broke Millennial shared that in the research for her book Broke Millennial’s Guide to Investing she found that there was a general consensus that 5% was the benchmark. If your interest rate is less than 5% you should invest instead of pay down debt, and if it’s above 5% you should focus on repaying debt before diverting additional dollars towards investing.
3) Increase Income at your 9-5
Increasing income at your 9-5 is easier said than done, I know, but it is a way to find extra cash to invest in the stock market (potentially a material amount). Think of someone going from $40k to $50k, or $55k to $70k. If lifestyle inflation is avoided there is potential to invest an additional $5k-$10k in each situation after taxes are taken into consideration.
There are many factors that come into play here, and I recognize that not everyone is able to increase their income at their 9-5. They may be new to their job, have compensation tied to experience (i.e. teachers), or work in an industry that is more difficult to move around in. Due to life circumstances it also may not be the ideal time to ask for an increase or to look for a job externally.
With that being said, a couple ways to increase your income at work is to ask for a raise or move into a new job. A few tips:
- Use Salary Data as Support – There are sites like Glassdoor and Payscale that provide crowd-sourced salary data for various positions at companies all across the United States. This can be good data to leverage when asking for a raise. Here’s how to find and compare salary data.
- Be Open-Minded about External Opportunities – Some companies pay more money than other companies for similar jobs. It’s always been that way and always will. Glassdoor can help you identify higher-paying employers in your area. Leaving an employer is never easy and it’s tough to know whether the company culture will be better or worse, but I would suggest at least keeping an open mind to taking an external offer. I also would recommend having an idea of how much money and what sort of job it would take for you to leave for an external employer. An external employer looking to bring you in is more likely to meet your demands than your current employer.
- Keep a Record of Accomplishments – In our world of once-a-year reviews, it’s important to keep a running list of what you accomplish on a monthly or weekly basis, if not daily. This will make review time easier as you will be able to quickly pull together a list of examples of achievements the past year.
- Regularly Look at Job Openings to Identify Trends – Even when you are not looking for a new job, it can be beneficial to look at job postings. Why? Because you can get a sense of what soft and hard skills employers are looking for, and then spend the next few months developing those skills.
Ultimately not everyone is going to be able to increase their income at their 9-5. If you are in that situation – and even if you are not – consider starting a side hustle.
4) Start a Side Hustle
A side hustle, or in other words any way to make money above and beyond your 9-5 job, has so much upside. The most obvious benefit is additional cash flow that can be used to pay off debt, invest, or take a well-deserved vacation. But beyond that it helps diversify income streams, potentially creates a new full-time job or business, and in general opens you up to additional opportunities. If I hadn’t started my blog seven years ago my life would look much different and I would have never had been given some amazing opportunities.
I want to be clear that a side hustle is not for everyone. If you work sixty hours a week at your 9-5 and come home exhausted each night, a side hustle generally isn’t a good idea. Thankfully there are a wide variety of side hustles. Some people need cash flow, and they need it NOW. A traditional part-time job may be the best situation. Others may have dreams of building a business that would allow them to leave their 9-5 job one day. They may not make much – if anything – off their side hustle at the beginning, but it can result in a windfall of cash down the road.
If you are interested in starting a side hustle and want to find the best one for you, here’s 50+ online and at-home side hustle ideas and here’s 10 ways I’ve personally made side income.
5) Get a Higher Interest Rate on your Cash Savings
This last idea will only have a material impact if you have an established emergency fund you keep in a savings account. Even those who don’t have an emergency fund most likely have it as one of their top money goals.
My wife and I built an emergency fund a few years back, and it was one of the best moves we made. Knowing there was cash in the bank if we needed it helped significantly with any stress we had around money. We made one dumb mistake for a number of years, though: we kept the cash in a savings account at a local bank.
Our interest rate? 0.01%.
We were basically getting zero dollars in interest, despite having a significant amount of money sitting in an account at the bank. Once you factored inflation in, we were basically losing money.
Switching to a high-yield savings account at a different bank gave us more than $500 in additional cash flow each year. That’s an extra $500 that we are able to put towards investments. All we had to do was take the time to open a savings account at CIT Bank (which pays 2.20% APY at the time of this writing) and shift our savings over to it. Excluding the time and effort it took to establish an emergency fund (which was hard work), switching banks and making an additional $500 a year was one of the easiest ways we’ve made money. And it repeats year after year.
At the end of the day, these are all good things to consider looking into regardless of what situation you are in. Extra cash doesn’t have to be used for investing in the stock market – it can be used to pay down debt, invest in real estate, save up for a vacation, build an emergency fund, and so on. Whatever your goal may be, increased cash flow doesn’t hurt.
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My personal bias is that starting a side hustle is the best way, but the most important thing is to be actively focusing on funneling more money into investments – that is how the real wealth is built!