Bootstrapping Your Way to Financial Independence

November 17th, 2020

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This is a post from John Bosse, a New York-based financial consultant who works with individuals to help them strategize for retirement.

Here’s the good news about bootstrapping: If you do it with discipline, focus, and a sense of direction, you can retire with passive income earlier than expected.

Here’s the bad news about bootstrapping: Reread the part of the paragraph above about discipline, focus, and a sense of direction. The benefits of bootstrapping your way to financial independence come after you’ve invested those attributes.

If you think you can bring those attributes to the table, let’s look at the plan.

What Is Bootstrapping?

The term comes from the saying, “pull yourself up by your bootstraps,” or improving our situation through our effort and ourselves alone.

Over the years, the term has come to mean any kind of progress from grit, determination, and building on a foundation of small successes to create escalating success.

In this case, we’re talking about bootstrapping with passive income to create financial independence. You’ll start with small investments that yield small profits, then use those profits to increase your earnings until it’s time to quit your job and retire early. Here’s how.

Bootstrapping and Passive Income

Step 1: Market Research

Before you invest in passive income streams, you need to know everything you can about two factors: what you’ll be investing in and your ability to invest. We’ll start with the second.

Begin by analyzing your finances. How much can you invest, and what can you spend each month to make the investment more profitable? If you’re not already tracking your monthly budget, do so for the past six months while looking for existing disposable income you could invest (or things you can cut from your budget to find that money).

Once you have that worked out, look into the various forms of passive income that interest you. Learn about how they work, what different varieties exist, and every factor about the market that you can.

While you’re at it, learn about passive income best practices in general. There are hundreds of ways to earn passive income, but thousands of ways to do it wrong and lose your money. Research carefully before you leap off this particular financial cliff.

There are many bootstrapping options, including starting an online or Etsy store or investing in various funds. Do your research to choose the option that works best for you.

Step 2: Initial Investment

Once you have your plan in place, it’s time to make an initial investment and start the program. This will happen in one of two ways.

For interest- or dividend-based passive income options, your initial investment can be the size of your monthly contribution. Once you find out how much you can put in each month, you just pick a month and invest that amount.

If your passive income plan is a business, you might need to invest more than your monthly amount upfront for things like web design, inventory, search engine optimization (SEO) for Amazon listings, and similar one-time purchases to get the company started. Do not use credit cards for these purchases. Most cards’ interest rate exceeds the initial income by so much that it will be hard to turn a real profit.

One better option is to take your monthly contributions and put them into savings until you have enough money to cover starting costs. You could also create a one-time cash influx with a garage sale, crowdfunding campaign, or temporary side hustle. Whatever you do, work with the money you have instead of money you borrow. Doing otherwise sets you up to fail.

Step 3: The Hard Part

This is the longest and most challenging step in the passive income bootstrapping process: You make your monthly contributions without fail every month, often for many months.

For interest- and investment-based options, that’s all you do. Maintain financial discipline and make your payments, watching the benefits accrue. For an online business, you’ll make those contributions monthly in marketing and fulfillment to keep it running and gaining momentum.

In both cases, the income you see coming in will be much smaller than the money it makes you. That’s normal and alright. Keep an eye out to make sure you’re not making bad investments (which you should have addressed in step one) and stay the course.

Step 4: Dividends

Eventually, your passive income method will make a profit. If you invested in microloans, you’d see money from the interest payments. If you began an Amazon shop, you will earn sales. If you invest in stocks, you’ll receive dividends.

The first time this income exceeds what you spent during the month is a milestone in your journey toward financial independence. For some models, it can occur after a few weeks. Others take months. Be patient and have a celebration ready when it happens.

Step 5: Reinvestment

Here’s where most investors make a mistake. They get the profit and immediately spend it on something they want. That’s a fine way to live, but it won’t move you forward on the path to financial independence.

Instead, reinvest your profits. If you made money off microloans, use the profits to invest in additional low-risk lending. If your Amazon store turns a profit, spend more on the marketing campaigns that gave you the best results. Turn around and use those stock dividends to diversify your portfolio.

One important exception to this rule: If you carry high-interest debt, use the profits to pay down that debt first. The interest on those accounts will usually exceed the income from reinvesting in your passive income. Once the debt is gone, increase your monthly investment in your passive income stream.

Step 6: The Snowball

Repeat steps three through five over and over again. With each new cash infusion to your passive income venture, the profits will increase. With each increase in profits, you’ll have more cash to infuse moving forward. This creates an upward spiral of increased income and wealth.

One day, that spiral will reach a level that it can fund your necessary living expenses. When that happens, you can quit your job and focus on making the new income stream work. Not long after that, the combination of your focus and reinvestment will generate enough income that you can just let the passive income stream mostly take care of itself.

Final Thought: This Is Not Without Risk

Many passive income blogs and offers make opportunities sound like automatic money makers with minimal risk. That’s how you can tell the difference between a legitimate opportunity and somebody selling you snake oil.

All investments carry the risk that you’ll lose your money. No initial stages of any profit-making venture require no work or research. If you choose to bootstrap your way into financial independence, know that you will have to perform analysis carefully, exercise discipline, and watch over your investment — at least at first.

This will require more work at the beginning, not less. But after a while, you’ll need to do less and less until you genuinely achieve financial freedom.

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