Early retirement. Escaping the soul-crushing 9 to 5. Doing the work you love, when and only when you choose to do it. When it comes to work, these statements were all central to the original theme of Brave New Life when I founded the site a few years ago, and they still are.
But let’s face it… Pulling off early retirement in your 30′s while living on the grid and living a semi-normal life isn’t an easy path. Particularly, not everyone can make enough income in 10-15 years to save up several hundred thousand dollars of investment capital, ultimately creating passive income that can sustain a family’s living expenses.
In my case, after paying off my home mortgage, my family and I are spending about $2300/month. This works out to $27,600 per year in required income. Using the 4% rule, an investor must save up $690,000 in taxable savings in order to retire from that. If you’re making $100K/year and living a simple life, it won’t take long to save up sufficient funds. But if you’re making $40K/year and spending the same $27,600, saving up $690K will take several decades. I regularly receive emails from readers in this predicament, and so I have one thing to say:
Hope is not lost.
According to the always-reliable definition on Wikipedia, a micro-business is a small business with 5 or less employees, and starting with capital of $35K or less.
I like running small businesses. I enjoy the challenge of transforming nothing into something, the thrill of learning new skills, and the personal test to stretch beyond my comfort zone. At the same time, I usually don’t want to commit to investing anything close to $35K for a business, nor do I have any desire to hire and manage so many employees. This is why I’ve coined the term “nano-business” to describe the businesses I’ve started, and continue to run.
Nano-business (noun) – A business made up of 1-3 people, with less than $1,000 initial capital, that targets cash on cash returns, and does not necessarily target long-term capital growth.
Nano-businesses are great for so many reasons. They can be started on a shoe-string budget, they require as much or as little time commitment as you want (ie. you can still work a full-time job, spend time with your kids, etc.), they can be scaled bigger or abandoned with ease, and the potential monetary loss is minimized because of the low investment required to start the business. And, best of all, a nano-business is a great tool that can bridge the financial gap for someone trying to retire early, but lacking the monetary savings to support their dream.
But before I get into all the benefits of a nano-business, I’ll share some history on how I got involved with my first nano-business…
A Little Backstory
About 5 years ago, my mom was making some insignificant side income selling wholesale jewelry on eBay. She’d only bought about $1000 worth of jewelry, doubled the prices, and listed the products on eBay. Seeing her moderate success, I got excited and offered to build her a website so that she could also sell directly to customers (avoiding eBay’s high commission charges and increasing her growth potential). Being on a shoe-string budget and generally internet-illiterate, my mom was reluctant. But I showed her how low the monthly payments were to host a site ($7/month at Bluehost), and how cheap it was to buy her very own domain name (first one is free with Bluehost for the first year). I offered to set up the website, help her mass-import her inventory, set up Paypal, and even do a little search engine optimization.
Eventually she agreed to try it out, so I got the website set up and she immediately started contacting her eBay customers and letting them know about her new site. A few orders came in. I was off work for the Christmas holiday, so I spent about 2 weeks improving her site – and soon we started seeing some new customers coming in via Google searches. I wasn’t making a dime, but we were we both excited at our initial success!
Fast forward a few years, and business was rolling. My mom was selling about $5K/month at ~50% margins, and very low operational expenses. Her inventory and customer base continued to grow. I was doing almost no work (which was fair, since I also wasn’t being paid), but I did enjoy what minimal work I was doing. Soon after this, my mom, my wife, and I got together and decided we’d start a new website, and this time we’d be partners offering a wider array of products.
So I got busy setting up a new website, a cleaner one that was better optimized for usability. My mom and my wife began looking at new products we could sell, and I’d do the keyword analysis on the products to see whether I thought I could sell the products successfully online. It was an exciting time, and adrenaline was pumping through our collective veins.
A year later, we were up to about $4000/month in sales on the new site. After paying operating expenses, we were collecting a 40% profit. Splitting it 3 ways, that meant that my wife and I were making an average of about $1070/month. We were making good side-income with very little work, and we were having fun doing it.
Nano-businesses: A Breakdown of the Benefits
Here’s a breakdown of some of the benefits of a nano-business based on my own experiences over the past 5 years.
There’s an old saying, “You have to spend money to make money.” That’s all well and good, but for many frugal people (like me), it’s a hard concept to digest. I realize I could grow a business faster and increase profits by spending more money, but with a nano-business that’s simply not necessary. A website, for example, can be purchased for just a few dollars per year – and can be hosted on a reliable server for just a few dollars a month. There are tons of free open-source options to host a website, blog, or e-commerce store that are absolutely free – other than your time to learn the software. From there, the only costs are inventory (if you’re selling something), advertising (if you can’t or won’t do it yourself), and outsourcing work (again, if you can’t or won’t do it yourself).
Flexible Time Commitment
The time commitment for a nano-business is up to the owner. The owner can work relentlessly in the beginning to get it started, or he can take his time and grow slowly. He can work hard during weeks where he’s motivated and has free time, or he can take time off to relax. Are you running an international e-commerce store, but only want to answer your cell phone between 9-5? Fine, then say that on your website and have them leave a message. You might lose a sale, but that’s OK. You work for yourself. Running a small lawn-service business but only want to work on the weekends? That’s fine too – you’ll limit your growth and profit, but it’s your business and your decision.
A nano-business can be scaled larger in two ways. Of course, you can grow your business the old-fashioned way through hard work over time, advertising, networking, product expansion, and other traditional means. Or, with a nano-businesses, you can easily just start a second business. For example, while I’m running an online store that profits $500/month and only working a few hours a week, there’s no reason I can’t start a second one with the goal of achieving another $500/month. This may double my time spent working, but also double my profits. But as a nano-business owner, I get to decide if/when I scale, and what I work on when I do it.
Because of the low initial investment, my risk of failure is also reduced. As a personal example, I have had many nano-businesses fail. Usually because I lost my passion to do that particular work, but not always. However, because I only invested a small amount (less than $1000), failing was a perfectly good option. There was no reason for me to continue doing the work that I was not passionate about, when I had almost nothing to lose. On the other hand, and speaking from personal experience, I have lived in misery for years on a business I bought for $7000 that failed miserably (This was not within my definition of a nano-business). I couldn’t let it go, because it seemed like such a waste to lose my $7000 investment. When I finally gave it up (sold it for $800), it was a huge weight off my shoulders.
Bridging The Early Retirement Financial Gap
Returning to the original point of this article, let’s explore how nano-businesses can help enable an early retirement. Saving up $600K or more isn’t easy, and for some it could easily be viewed as completely unrealistic. That’s OK – there’s another way to “retire” early. It may not be “retirement” by whatever strict definition you choose, but it certainly can help you get out of a job you no longer enjoy, while still reducing any risks of financial bankruptcy.
Let’s assume some basic numbers, and please forgive the over-simplification for the sake of this argument. We have a 40 year old employee (let’s name her Ophelia), who has been making $50K/year since she was 22 years old. She has a family now, but for the sake of simplification let’s assume she’s always spent $27,600/year, and will continue to do so. Let’s also assume that our friend has never invested her savings in anything, instead she’s kept all of her money in cash.
So Ophelia has been saving $22,400/year for 18 years, creating a nest egg of $403,200. This is well short of the $690,000 needed in savings to retire, based on the 4% rule. In fact, with $403,200 saved up, Ophelia is only pulling in $16,128/year in passive income, a full $11,472 less than she needs. This puts her in a deficit that runs $956/month. This is not a good way to start an early retirement, so the easy answer is that she needs to continue to work for another decade or so.
But we don’t like the easy answers here, and neither does Ophelia. In fact, Ophelia chooses to reject the conventional view that she is $290K short of her savings goal, therefore she must continue to invest $22K/year for the next 13 years (at which point she will be 53 years old). Instead, Ophelia breaks down her deficit into a monthly problem. She is just $956 short each month, and making $956/month is not insurmountable. In fact, she already has some ideas for businesses.
You see, Ophelia likes making crafts at home to decorate her house and to give as gifts. So the next time she’s making a gift for a friend, she decides to take a picture of it and put it on Etsy. The cost of materials was $25 and took an hour to make, so she marks the price up to $50 and posts it to Etsy.com. There was no cost to posting the product, and since she was giving away the original product as a gift to a friend, she decided that she’d only make another one if an order came in. Sure enough, a few orders came in. After a few months of this, Ophelia realized that her sales were good enough that she could buy the materials at a discount by buying in bulk online. And so she drove the cost of goods to $15, now profiting $35 on each sale. She was averaging 3 sales per week, or about $400/month while working only 12 hours from home doing something she enjoyed.
For someone making $50K/year, $400/month doesn’t seem all that significant. But Ophelia didn’t view it like that. Instead, she saw $400/month as a huge dent in her $956/month deficit once she retires. Now her deficit was only $556/month.
So Ophelia decides to seek out another business venture. You see, she’s a computer science major, and has been writing Java for years. In fact, she’s a bit of an expert. Her career has been focused on GUI writing for corporate compliance training at a major Fortune 500 company, and the material there is monotonous enough to crush her. But she never fell out-of-love with programming as a science and art. So she signs up for a Team Treehouse account to transition her Java experience from her corporate job into writing Android Apps for profit. She knocks out all that education in 3 months, and begins writing her first app. The downloads start slowly, but soon she’s making $20/day in sales and advertisement clicks on her two best apps.
So now her apps are making $600/month, plus the $400/month from her Etsy crafts. With just a few months of work up front and a few hours of weekly work from home – she has now overcome her monthly deficit and can safely quit her job. Better yet, now she can continue to grow her nano-business (or start new ones) now that she has freed up an additional 50 hours per week that she’s not spending in her office cubicle.
Is this really possible?
Yes. Ophelia’s journey may seem too simple, too easy, and too ideal. But the examples I used are real. I’ve personally run an online e-commerce business, an Android app business, and this blog – all for profit. My wife continues to sell things on Etsy in the same manner that our fictional Ophelia did. In fact, we’ve found it quite easy to make $1000/month while I work full-time and she watches 2 kids full-time, and I see no reason we can’t easily multiple that when I quit.
The opportunities are endless. Find something you enjoy doing, and think of ways to monetize it. If you truly enjoy it, and your goals are only to make nano-business type money, then you’ll find a path to make money, as I’ve done. And, once you’ve retired, nano-businesses are also a great way to fill the other retirement gap.