Entrepreneurship is great due to the high correlation between effort and success. But just how much entrepreneur income do you need to replace your day job income? It may surprise you that it actually takes a lot more income!
I had a day job working in investment banking from 1999 to 2012. And I’ve technically been an entrepreneur since 2009. It was only in 2012 when I decided to become a full-time entrepreneur.
Fortunately, starting your own website like this one is very inexpensive and easy to do nowadays. If you want autonomy and believe you have what it takes to create income out of thin air, go for it!
Entrepreneurship is an incredibly exciting adventure. There’s nobody to blame for your failures. Just like there’s nobody to reward but you for your victories.
Anybody who incessantly complains about their job should just give entrepreneurship a go. They will probably never complain again.
A day job is a walk in the park compared to entrepreneurship. Making entrepreneur income is very hard work because of the necessity to wear many different hats, e.g. accountant, operations, marketing, sales, producer.
What I’d like to do in this post is provide a rough estimate of how much you entrepreneur income you need to make in order to earn equivalent money as a worker bee.
Hopefully this post will give you a better idea before taking a leap of faith. After all, you don’t want to quit your job and die alone do you? There’s no honey when you got no money.
Entrepreneur Income Needed To Replace Day Job Income
Take a look at this chart I put together based off of a $100,000 day job salary. There are two components to the chart:
1) How much your day job salary is really worth after adding up all the benefits,
2) How much an employee doesn’t have to pay because s/he is not an entrepreneur.
Overall, you need to make 30% to 60% more as an entrepreneur to be equivalent to a day job income. In other words, you need to make $130,000 – $160,000 as an entrepreneur to earn a $100,000 day job income equivalent.
Entrepreneur Income Vs Day Job Income Chart Review
True Value Of Your Day Job
I’ve used very typical benefits given to a $100,000 a year employee. Clearly some companies will provide more paid vacation, less 401k matching, better ongoing employee training, and higher cost of living raises.
In some fields such as banking, a bonus can be equivalent to multiples of base salary. But overall, I’m making an estimate that the true value of your job is worth 1.3X your salary. See the top half of the above chart “What You Get As An Employee” $130,800.
Contractor Salary Conversion
1.3X is also the multiple I believe a 1099 contractor can use to calculate how much more s/he needs to earn to make an equivalent day job income.
A contractor forgoes benefits such as healthcare, paid time off, pre-tax retirement plan, 401k matching, options, life insurance, disability insurance, and guaranteed 40 hours worth of full-time work a week. Some contractors actually charge much more than 1.3X a day job equivalent rate.
I use an asset-light business model, e.g. internet. There are some businesses that are very capital expenditure heavy. But these are businesses that individuals would probably not go into.
If you assume an individual gets into a retail business such as selling baked goods or clothing, “Office” rent would shoot through the roof, as would its costs of goods sold.
All the items under “What You Don’t Have To Pay As An Employee” are all business expenses. As a result, the $29,650 can be deducted from revenue to lower taxes. If we assume a 30% effective tax rate, the true cost goes down to roughly $20,755, making the grand total needed as an entrepreneur to replace day job income closer to 1.5X.
Furthermore, the OASDI + HI employer expense phases out at $117,000, which means there is convergence at higher income levels. The reason why I keep the 1.6X multiple in the chart is to be conservative.
If your total business revenue was $30,000 your first year, but you had all these necessary expenses, you’d end up with hardly anything left to live. Whereas an employee making $30,000 will breathe much easier.
Entrepreneur Operating Income Requirement
I estimate an entrepreneur needs to make 1.6X more than a day job income to come out the same. The range is probably somewhere around 1.3 – 2X for the majority of cases.
As you can see from the chart, an entrepreneur must pay extra taxes, fees, and expenditures for growing his or her business. The fun kick in the pants is that if an entrepreneur fails, s/he cannot claim unemployment insurance despite the taxes paid.
With higher income levels, there is operating leverage for the entrepreneur as s/he doesn’t have to work as hard for the same income. I estimate at income levels above $500,000, there is a lower multiplier necessary for an entrepreneur to replicate a day job income.
Table For Converting Entrepreneurship Income To Day Job Income
This is a handy dandy chart if you are currently an entrepreneur looking to give it all up and go back to a day job since it’s so much easier. As you can see, you don’t have to make as much working for someone else as your employer will take care of a lot of the expenses you once incurred.
This chart is also a great way to compare yourself to entrepreneurs who publicly highlight their income. The higher the numbers, the more skewed the results.
Table For Converting Day Job Income Into Entrepreneur Income
This chart is very important to study for all who want to engineer their layoff to become an entrepreneur. I’m telling you from years of experience that making an equivalent entrepreneurial wage is very difficult. But, if you start to gain traction, the freedom and satisfaction you gain helps make up for the income difference.
At higher income levels, the numbers become skewed in the entrepreneur’s favor given the OASDI + HI tax caps out at $132,900 for 2019 and there is more operational leverage as an entrepreneur.
There’s A Mental Disconnect As Well
What’s interesting is that converting entrepreneurship income to day job income seems more reasonable (2nd table) compared to converting day job income into entrepreneurship income (3rd table).
For example, I can see how $250,000 in entrepreneurship income is equivalent to about $156,250 in day job income based on experience. There are plenty of $156,250 a year jobs one could get if they no longer want to be a $250,000 a year entrepreneur e.g. consultant, banker, lawyer, engineer.
It’s harder to grasp that one needs to make $250,000 a year as an entrepreneur to replace their $156,250 a year job. If you look at higher income figures, it gets more daunting e.g. $400,000 in entrepreneurship income to replace a $250,000 a year day job.
The good thing about entrepreneurial income is that there’s a lot more upside and leverage. Furthermore, you’re creating a business as an entrepreneur that could one day be sold.
The reason for this disconnect is probably my own bias for not having achieved in entrepreneurial income the maximum amount I achieved in my day job income. Most of us are worker bees, hence trying to comprehend entrepreneurial income is more difficult.
The other reason for the disconnect is that I simply don’t know that many entrepreneurs who are making $250,000 a year or greater in operating profit before tax. Whereas there are plenty of people I know making $250,000 or greater at their day jobs. Heck, even our retired SF police chief makes around $250,000 a year in pension money.
Related: How To Make Six Figures A Year At Almost Any Age
Go The Hybrid Route First
I’ve really spent a lot of time thinking about these charts as a person who went from 13 years as an employee to four years as an entrepreneur. I’m sure my views will change further the more entrepreneur years I have under my belt.
But for now, I encourage every day job employee to really think about the numbers above before taking the leap of faith. Start your website on the side and make some money while working a day job.
Here’s a real life example of a blogger friend of mine who started his site in 2012 and now generates roughly $150,000 a year from his site and another $180,000 a year in consulting income due to the recognition of his site.
Starting a blog or an online business is truly one of the best ways to go because it is scaleable, cheap, and allows you to brand yourself online for new opportunities.
One thing employees take for granted is the consistency of their paycheck. Every two weeks or every month you will get paid so long as your company isn’t going bankrupt. As an entrepreneur, each month is an adventure, but it’s a worthwhile adventure with unlimited upside!
If you make $120,000 as an entrepreneur, it’s not bad, but it’s really only equivalent to about $80,000 a year as an employee.
My recommendation is to moonlight for as long as possible until you know with great certainty that your entrepreneurial income can cover all your basic expenses for six months in a row. That is the point where you should feel confident to take the leap of faith and go for entrepreneurial glory!
Recommendation For Leaving A Job
If you want to leave a job you no longer enjoy, I recommend negotiating a severance instead of quitting. If you negotiate a severance like I did back in 2012, you not only get a severance check, but potentially subsidized healthcare, deferred compensation, and worker training.
When you get laid off, you’re also eligible for up to roughly 27 weeks of unemployment benefits. Having a financial runway is huge during your transition period.
Conversely, if you quit your job you get nothing. Check out, How To Engineer Your Layoff: Make A Small Fortune By Saying Goodbye.
It’s the only book that teaches you how to negotiate a severance. In addition, it was recently updated and expanded thanks to tremendous reader feedback and successful case studies.
Start Your Own Website And Become An Entrepreneur
It’s never too late to get started. There are endless possibilities to earn entrepreneur income. Plus, if you want to learn how to get very rich, the answer is to build equity in a business.
Every business needs their own website. Here’s a step-by-step tutorial showing you how. Not a day goes by where I’m not thankful for starting Financial Samurai in 2009.
I ever would have imagined being able to engineer my layoff from a well-paying job in 2012 to just write and be absolutely free. You just never know what might happen if you try. Back when I started, I had to hire someone for $1,500 to launch FS. Now you can launch in under 30 minutes for less than $50.
Today, Financial Samurai generates more in operating profits that I made working 60+ hours a week as an Executive Director in investment banking. Further, I spend way less time and have a lot more fun.
Related post: Reflections On Making Money Online Since 2009
For more nuanced personal finance content, join 55,000+ others and sign up for the free Financial Samurai newsletter. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009.
[…] With six years of living expenses I was emboldened to try my hand at online entrepreneurship. […]
[…] How Much Do You Have To Make As An Entrepreneur To Replicate A Day Job Income […]
[…] You’ve got to make more as a contractor to stay in place. Based on my analysis, you’ve got to make 20-30% more as a contractor to replicate the total compensation of a full-time salary. Contractors seldom get any of the […]
[…] of the biggest reasons not to be self-employed is that you have to pay BOTH SIDES of the FICA tax: 15.3%. Employees usually only pay half the […]
[…] How Much Do I Have To Make As An Entrepreneur Or Contractor To Replace My Day Job Income? – I put together a very detailed expense analysis for those who want to become contractors […]
[…] got to look out for yourself if you’re not getting the love. Just don’t forget that you need to make much more as an entrepreneur to replace your day job income if you decide to go […]
[…] time I walk into a coffee shop, I see guys fiendishly coding on their laptops. Although the chances are slim to ever make it big as an entrepreneur, thousands of predominantly 20-something year old men try their luck anyway. Huge respect for […]
[…] How Much Do I Have To Make As An Entrepreneur Or Contractor To Replace My Day Job Income […]
Please keep in mind that you have a much broader audience than you might suspect. A huge number of Americans struggle to work toward a maximum income of $40,000 during their lifetimes. If I had a job paying me $75,000 or more, I would be ecstatic; but, as it stands, I am only a capable 33 year old woman stuck at a dead end job making $48,000 a year (50 hours a week and 2.5 hours a day in rush hour) in an area of the country where the price of living is quickly climbing. Additionally, jobs of that pay anywhere near this much with my lack of qualifications are few and far between. I have an IQ of 145, but I dropped out of college due to illness and went to work to pay medical bills which still prevent me from gettinger more student loans. I’m under qualified for corporate success. My story is just one of many demonstrating that a perfect life and education is sometimes a very far reach. There are MANY of us who don’t have a lot of hope for a financially easier life outside the dream of entrepreneuralship (if that’s not already a word, it should be). The extra hard work is more welcome to some rather than others as is the risk. So, if I worry about my future, and happen to complain a little on the way, it’s because my current path will leave next to nothing to show for the long and stressful deadend days.
Financial Samurai says
Thanks for sharing your story. I’ve been recently working an extra 10 or so hours a week driving for Uber. It’s done during early mornings or at night when there’s no traffic to see what it’s like earning a pro-rated $40,000 a year, and I’ve been going at it for several months now. Maybe give it a try if you have time and want more freedom? I’m earning about $25/hour net, $35/hour gross.
What’s It Like Driving For Uber? Feelings Of Hope And Sadness
Spoiled or Clueless? Trying Working A Minimum Wage Job As An Adult
I think you will really enjoy reading these posts. It will give you some inspiration!
One advantage of uber driving is you are in a closed room with prospective customers. This guy makes $250k a year by hanging a necklace in his car. When people ask him about it he gives them a soft sales pitch. Uber is OK with this, as long as customer initiates conversation it seems.
To keep things interesting, if one owns a rental property business, there may be enough tax write offs (mortgage interest, depreciation, etc) where you can actually make less than a day job and come out even.