This Little-known Asset Class Could Help You Reach FI Faster
Updated on March 16, 2020
Ever wake up one day and realize you need to change your life? That the status quo wasn’t good enough and that you couldn’t settle until your life felt like it was actually yours?
A growing community of people have had that exact realization and decided to take action by creating their own kind of independence, powered by personal finance.
Financial Independence (FI) is the aim to have enough money to live off for the rest of your life without needing employment. It bucks the traditional system of being tied to a job to fund consumerist habits that lead to unfulfillment.
Financial Independence is often paired with the idea of retiring early, known formally as Financial Independence Retire Early (FIRE). The goal of FIRE is to minimize time spent working to maximize living a life of your design.
The methods to reach FIRE most focused on within the FI community are frugality and investing well. Most reach FI through investing in real estate or the stock market. Both are solid investments but there is another asset class hardly spoken about that could benefit those who aspire towards financial independence.
Online business assets are the untraditional investment that can provide significant income and return on investment (ROI). It’s a powerful investment opportunity that could cut years off the journey to be FI.
Let’s go over how online business and financial independence go hand in hand.
The Current State of FI and Online Business
If you’re looking for advice on the best investments, house hacks, living frugally, and saving money on taxes, you’ll find a goldmine of information around the Financial Independence community.
Things start to thin out though if you’d like to connect your FI goals to online business.
Sure, there is information about online ventures within the FI community but it is pretty broad, often vague, and typically is referring to small side hustles rather than full-fledged enterprises.
Some sources talk about the power of e-commerce, lists of ways to make money online, or why you should start a blog, but that’s a far cry from showing you why you’d want to invest your time into an online business in the name of FI.
For all the insight on investing and real estate, very little has been written on online assets. This is probably because most who get involved in online business are thinking about cash flow and passive income, not approaching their business as an online asset.
This is the sweet spot where with a slight shift in mindset and approach to earning online, someone building towards financial freedom could hack years off of their journey to retire early or leave their 9-5 in favor of a more flexible lifestyle.
How to Reach FI Faster With an Online Asset
One of the most well-known figures in the financial independence community, Mr. Money Mustache (aka Pete Adeney) says that by putting away a million or just over, you could live off that money for your lifetime. Based on the 4% Rule, you could spend 4% of your million-dollar nest egg a year and live off that for 30 or more years.
We can’t argue with the logic or numbers behind this. We just think there’s an alternate journey to get there.
Just like there is no one way to reach financial independence, you aren’t limited by the number of ways you can leverage online business to reach your FI goals. In fact, if you want to achieve that FI goal faster, then leveraging a business you can start or buy online should be a strong part of the mix for you.
Here are just a few examples:
Increasing Extra Cash Flow to Reach FI Faster
One of the main pillars of FI comes to a very simple premise: earn more money.
The more money you earn, the more money you can save. The more money you have, the greater chance you have of being able to create your own work scenario or early retirement. One of the most encouraged methods to earn more money is to have a side hustle.
The FI community has put together several promising scenarios showing how just a bit of extra income a month can amass into large savings by retirement. For example, just $279 a month in extra income invested into an HSA account will grow into over $300,000 in a 30 year period. You can achieve the same return that $300,000 gives you at 4% with a side hustle making $1K a month.
That’s a massive impact that you can have on your savings with just a bit of side income. Imagine how swift those savings would grow if your side income is a full-fledged business. Take the example of $1K a month leading to $300,000 compounded over time. In the case of having an online business making $5K a month, you would reach that extra $300,000 five times faster.
That’s like attaching turbo engines to your savings goals by increasing cash flow through an online business instead of random side gigs.
The business mindset also translates into greater wealth when approaching portfolio investing, which we’ll get into next.
Investing Like the Wealthy to Reach FI
If you were to ask whose investment strategy you should copy, most people will answer Warren Buffet, considering he’s one of the most prolific investors ever. Buffet swears by investing in index funds, and if it has worked for him, that seems to be a good enough strategy for everyone else.
Buffet’s strategy still serves as a good northern star for investing, but it doesn’t show you the entire picture for how the wealthy invest to make their fortunes grow.
Financial Samurai put together this helpful overview of how the wealthy spend their money. You can see that as the net-worth climbs, so do the investments in their own businesses or ‘alternative investments’ like equity in other businesses.
Your own business, and taking on equity in other businesses, has shown to be the fastest vehicle to build wealth for high-net-worth individuals. But for the average person, it’s hard to find a foot in the door to leverage business for growing personal wealth.
Unless you treat an online business as your foot in the door to build wealth like the wealthy.
The barrier to entry to start a business or take share of a business in the online world is much lower, opening up a multitude of opportunities. Through online assets, it is possible to own your own business and simultaneously act as a business operator for an investor for another business, allowing you to collect your piece of profits and equity from both businesses. It’s possible to run your own fleet of online businesses, giving you a dynamic investment portfolio.
The most powerful aspect of business ownership is those profits are yours and so is the full value of the business in the case of a high multiple exit. Selling your business for years of profit upfront can be a life-changing financial event that could change your net-worth overnight.
A successful business sale within itself is a good reason to consider this investment strategy. By mirroring the investment strategy of the wealthy, successful business investment can allow you to cut off years of saving towards FI and give you wealth that leads to real freedom.
Selling Online Assets to Hit Your FI Number:
Reaching that million-dollar investment mark is daunting for most people. If you are dependent on a fixed salary and limited in your means of bringing in extra money, you may be in it for the long haul to reach FI. Selling online assets can be the cheat code for reaching financial freedom much faster.
Let’s say your goal is to have a million in investments and you’d like to reach that through online business alone.
One way of going about this is by selling five $200,000 businesses.
Six-figure exits are something we see every day. In this case study, an affiliate business was purchased for $52,256 and flipped within 16 months for $136,773. We’ve seen a seller double their investment in just two years in the sale of their $345,000 business. Another seller walked away with $400,000 for four years of work on their info product business.
All this to say, despite the few years it would take to build, buy, improve, or sell an online business it is still far faster than trying to get to FI through just wages combined with low index mutual funds.
Once you’re able to buy and sell a few businesses at this level you can put the money into the right investments that would allow you to live off that million for your lifetime. It sounds far fetched but we’ve seen a few sellers turn around $700,000 selling multiple businesses with us within a four-year window.
In this case of the 5 x $200,000 exits, you could reach FI within a 5-6 year window. That kind of ROI, at this speed, would give back more of your valuable time to do with whatever you choose.
Leveraging the Flexibility of an Online Asset
Thanks to the internet, we all can enjoy a kind of freedom that only a few decades ago was not possible. The beauty of online assets is you aren’t bound to a country or market. There are multiple ways of using this to your advantage to earn and save more money.
Location Independence & Geoarbitrage
An online asset can be managed from anywhere, which opens up the door for location independence or geoarbitrage. Geoarbitrage is a lifestyle design hack where you might move to another location with lower living expenses in order to improve your savings rate. If you make $120,000 a year, that income is going to carry you way further in a smaller city in the US versus living in New York City. Better yet, that $120,000 will compound savings at rapid speed somewhere like Chaing Mai, Thailand where you can easily live for less than $1,000 per month while operating your online business abroad.
Because your online business can be run from anywhere in the world, moving to a cost-efficient location might be one of the most powerful levers you can pull to stockpile enough money to reach FI. If you’re curious how this works, Nomadlist has a great Financial Independence Calculator that shows you how soon you could retire based on different international locations.
Benefit from a Global Market
Another benefit of the location independent aspect of online assets is you can take advantage of global markets. You can sell or market to anyone, opening up a literal world of opportunity to make money. Real Estate will always be affected by the geographic market it is in, investments will always reflect the value of the national market. In some way, your money is tied to a certain place which makes it difficult to pivot if you need to make a change to your investment strategy.
Tax Advantages to Business Ownership
An online asset is still a business, which comes with generous tax advantages if you know what you are doing. Certain expenses can be written off your taxes as business expenses, putting your hard-earned money back into your pocket at tax time. You can also set up your location independent business in a state or country with more generous tax incentives. You can’t escape taxes with some kinds of investments or heavy property taxes in certain geographies. But you CAN minimize your tax burden with a business.
Scaling Hands-off Online Assets
You can get into the online investment game with much smaller amounts of capital than other investments. You can also run these assets with very little time investment. There isn’t a limit on how much capital you can deploy into online assets that can earn for you while you sleep.
The benefits to online assets align with FIRE ideologies: they give back time, create freedom, and allow you to follow your passions in life while shortening the actual distance to your goal.
But with the Reward… Comes the Risk
Online business, compared to other investments, could be considered high risk, high reward.
We don’t want to gloss over the inherent risk with this asset class so let’s go over who might not be cut out for this kind of investment.
All online assets are at the mercy of algorithms and updates, controlled by God-like players like Google, Facebook, and Amazon.
Getting into the online game, you know you’re going up against this uncontrollable risk. Your business could be seriously hit by a Google update or a mistaken Amazon penalty. You have to try to forecast those risks and be prepared to act if they do happen. All this being said, the present risk here is not dissimilar from more high-stakes investments in real estate or the stock market. When you want to earn larger and faster, you must accept more risk. If you want to play it safe no matter what, your risk aversion may not work in the online world.
If you can’t turn on a computer, online business isn’t for you. It’s not rocket science but depending on the business and how deep you’d like to work on it, it can be somewhat complex. If you lack computer skills and the internet mystifies you, invest in an area where you have more skill or make sure you partner with someone that has the online business skills you need.
If you’re retirement age and ready to live off your investments, online business might not be for you. This comes down to your investments being your livelihood, and you don’t want to start taking larger risks when all of your money is at stake.
That being said, common-sense can help mitigate risk. In general, you should never put all your savings or emergency fund into an online business (or any investment venture for that matter).
Instead, you’ll want to create a portion of money you feel comfortable putting towards riskier investments. That portion of money shouldn’t exceed 20% of your cash assets typically. If you’re younger than 30, then, of course, you might buck this rule in favor of the potential for fast growth. The 20% rule is a nice conservative statistic to go by, but you’ll need to really define your personal risk tolerance to see if that makes sense or if you need to go lower or higher to hit your goals faster.
What you could try to do to minimize risk would be to create investment pools or as we call it, the Rules of Thirds. Let’s say you divided your total investment capital of $150,000 into three pools of $50,000 each. These pools of money can be applied to different investments you’d like to acquire or build. The idea behind the Rule of Thirds is that you acknowledge you may fail at first, and it lengthens your ability to play the game, learn those initial hard lessons, and make it out on the other side with a fast-growth ROI asset.
With one pool of $50,000 you could try your hand at building your first business within a particular monetization. You’d deepen your expertise within that monetization and apply what you’ve learned to your next $50,000 business purchase within that same monetization. Sticking to the same business model you, acquire your third business to have a small portfolio of complementary businesses.
If you want to consider all available options for monetizations to deepen your expertise, you can check out our popular online business models guide.
No matter what you choose, be strict with yourself and put yourself on a timeline of six months to act on and improve the investment. Be clear on the kinds of returns you want to see and create an exit plan for your investment.
Let’s not forget, with risk comes reward.
In our recent ROI study on content sites, we found that 67% of investors either saw their cash flow stay the same, or grow. Some of these buyers found their investment growing by as much as double and triple the initial cash flow that they had acquired. That is an inspiring statistic, considering most businesses fail with a disheartening 90% and up rate. If you can instead buy something that is already making money, you significantly improve the odds that the cash flow will keep flowing.
If you compare this to something like real estate, where the 1% rule applies, you can see just how much faster you can grow your nest egg.
If you were to buy a $100,000 single family property and rent it out at $1,000 per month, your actual take-home when everything is said and done would be about a $400-500 net profit per month if you’re using a traditional 20% down loan. Now, if you deploy that same capital to a $100,000 content business, you’d be making right around $3,400 in net profit per month.
In the real estate example, you’ll have a cash on cash return of 24% at $400 per month and $20,000 down. When you look at the online business example, you’ll get the cash on cash of 40% on your money if you paid the entire $100,000 for the online business with zero leverage.
That is almost double cash on cash return. And, it is not taking into account the ability to improve upon the digital asset. It is often easier to double a digital asset’s earnings than say a real estate asset, and the things you have to do in the online space to get that double growth is often less risky than what you’d have to do in real estate and the stock market.
In order to see the same ROI some of our sellers have seen within a year’s time, you’d have to make some volatile investments on the market and hope for the best. While online business isn’t free of risk, it certainly doesn’t equate to the same amount of risk you’d have to take on the market to see the same reward.
Why Online Assets Shouldn’t Be Overlooked By FI
Why you should choose online assets can be boiled down to two simple concepts: speed and ROI.
With just a few years you can leverage strong ROI to claim back years of time for yourself and live financially free. You could dive right in and reach FI through just online assets or have it work alongside other investments. There is no wrong answer, just a journey to build wealth in a way that is best for you.
We hope this sheds light on one more investment option for you to consider. If you’re reading this and realizing online assets would make a perfect investment for you, you can set up a call with one of our business analysts to discuss your buying criteria. If you’re ready to sell your online business to reach your financial independence goals we can help you plan a profitable exit.
