What if you didn’t need more money to live the life you want? What if you could live on less, spend less time on your business, and still be happy?
This is the founding principle behind “lifestyle design”–a term that has become popular since Tim Ferriss released his book Four Hour Work Week. The idea behind a “lifestyle business” is to grow a business that sustains your daily lifestyle while allowing you the time freedom you need to pursue what interests you.
Here’s what my optimal “lifestyle design plan” looks like:
Stage One: Build A Business to Sell
I already did this for my web hosting company. Work your butt off for 5-7 years growing a business that you can sell. Then sell it and let it go fully from your life. In this stage, you have to have a product or service that you can outsource or hire out. This sort of business can’t be a consulting business or something that isn’t saleable 5-7 years down the road.
Concurrently with this stage, practice living as frugally as possible. Track both business and personal expenses down to the penny. Know where your money goes every month. (This is what most people don’t do, so when they get a huge cash infusion, they squander it.)
Stage Two: Sell Your Business
Sell, then take the money and use it as a nest egg.
Here’s what I’d do with the money:
- Set aside 30% for taxes.
- Set aside 30% for “future”. Use this money and learn how to invest wisely. Invest in assets that pay out dividends. Fully fund your IRA if you haven’t already. (I like dividend stocks or Lending Club at this stage. Real estate is another option…but never put 100% of this fund into a single asset class.)
- Set aside 20-30% for a house or as “sustainability cash.” Buy a house outright with cash, or invest this money conservatively in a highly-liquid account with an eye to use it for living expenses for a while. Do not lock yourself into a mortgage.
- Use the bit of money you have left over to buy yourself some nice things. (When I sold my business, I used $60,000 to go on a fantastic vacation, buy a new car, buy some custom hand-made crafts, and buy some art.)
Stage Three: Take Some Time Off
Use your well-worn frugality skills to either travel the world for a while, or alternately settle down and relax for a bit.
Also, use this time to explore other passions and hobbies. For instance, one of my life goals is to learn another language, so I’m learning Spanish. I take a class 1-2x a week and plan to travel to more Spanish-speaking countries in the future so I can learn the language more quickly.
Stage Four: Make Enough Money to Survive
Depending on your exit from business #1, you may not be able to quite live off the proceeds of the sale of your business. Also, I know from experience that you will get bored with “relaxing” after 6-12 months. So, for your second business run, focus your skills on creating a business that will sustain your lifestyle–what you really want to do–while remaining low on time commitment. Just like you didn’t lock yourself into a mortgage above, you don’t want to lock yourself into a huge time commitment now.
Your biggest goal should be to start a business that sustains your ideal lifestyle while you work only a few hours a day.
This is where the Four Hour Work Week starts out, but I prefer having the nest egg of a business I’ve sold.
Four Pitfalls of Lifestyle Design
Most people struggle getting this plan set up in their lives. Here are some of the pitfalls I’ve seen people encounter along the path of lifestyle design:
- “Magic bullet” syndrome. “Erica, I want a business where I never have to work again and it just keeps generating money month after month!” Well–I don’t call that a business. I call that investing. Whether it’s real estate, dividend stocks, or Lending Club, those investments are out there. I currently have over $26,000 in Lending Club and it returns over $200/month in passive income; my net annual return is 11.75%. Awesome.
But you have to set up the automatic transfer every month into Lending Club (or dividend stocks, or a savings account) to see the returns. You can’t spend all your money on consumer junk every month and have a huge credit card debt and then whine that you “can’t afford” the transfer. (The folks with “magic bullet” syndrome often have huge piles of consumer debt to go along with it.) Get your financial picture straight, and you will see returns. And get realistic about what it’s going to take to get those returns.
- Starting a business that isn’t saleable. Many people start out by selling crafts, tutoring, or attempting to turn a hobby into a side gig. If your goal is to earn a few hundred extra dollars a month, that’s fine; it’s just not the topic of this post.
In order to make lifestyle design work, you have to have a business that other people value even without you working in it every day. It doesn’t matter whether you sell a product or a service, as long as you’re not selling “you.” Selling “you” means the business has no intrinsic value without you in it. (That goes for you bloggers, too, unless you could never write a post again and leave the blog alone for all eternity and it will continue to generate income that sustains your lifestyle. Better create a standalone product with its own URL if you don’t want to blog every day…)
- Not knowing where your money goes. You need to know what your expenses are, and be able to reduce them as necessary. Learn to distinguish between wants and needs. How much more productive will that new computer make you? What about that new shirt? When in doubt, don’t buy it.
- Wanting to jump right to the part where you retire. Similar to “magic bullet” syndrome, but this is where you start a business, and because you see a popular blogger or guru bragging about how he or she only works two hours a week, you think you can do the same. You’re over the “magic bullet” at this point, but still fully convinced that it only takes a couple hours a week to make big money. You easily forget all the parts of the guru’s stories where they talked about how they spent two or three or ten years creating content, learning marketing, and figuring out how to sell stuff–and encountered numerous dead ends and false starts.
Don’t be fooled. Even if they don’t work now, they’re reaping the rewards of the time where they worked a huge work week for little or no gain. And many of them, while appearing to have a “no work” lifestyle, are out there sending emails, working with their employees, tweaking ad campaigns, doing teleseminars, and posting blog posts every day. They just tend to forget that that’s “work”.
Which Path is Right for You?
My plan for lifestyle design isn’t set in stone. There are different ways to approach lifestyle design and be successful. Some people use their earnings from a lifetime of work instead of building and selling a business. I like building a business because it’s far faster.
And some folks go right to working their butt off, but instead of selling their business, they simply use their business as a source of somewhat-passive income. Nothing wrong with that as long as you can achieve it. I like selling the business because it guarantees you will never have to work for that money again, and it gives you 100% time freedom, but if you’d rather start at step #4 of building a lifestyle business, that’s fine.
With a solid financial education, perseverance, and a good understanding of what makes people buy a product, you can reap the rewards of creating your own lifestyle. Don’t be fooled, though; it will take a lot more work than you expect–but the rewards may also be greater than you expect!
Recommended Reading:
- Lending Club. I started investing in Lending Club over a year ago, and many people have asked me how my investments are going. I’m pleased to report I have a nearly 12% annual return. I would highly recommend Lending Club; you can get started with as little as $25 and watch your money pay dividends every month. I really love the whole concept. The link above will give you $25 to get started, so you really have nothing to lose by trying it out! (Note: This link gives me a few dollars too, which I invest back in my own portfolio in Lending Club. By signing up, you’re helping to support erica.biz…thank you!)
- The Complete Guide to Creating an Information Product. Here’s a step-by-step guide to creating a product that will help you generate passive income online.
- How to Start a Business with No Money. One of my most popular posts; shows how I built a business to $1 million without having a “nest egg.”
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16. April 2010 at 10:24 am
Ahoy Erica.
Well….I have a “different” perspective on ~ Lifestyle Design.
Of course, I am 52 years young. My model is balancing work and life each and every day. Agreeing with Tim Ferriss, the lifestyle model of working hard and saving for retirement is extinct (my opinion).
Deferring life until later is like saving SEX for old age.
I assume you “liked” what you were doing those years you were building your web hosting business. Sadly, I spent a good part of my life making a LOT of money at something I wasn’t passionate about.
I guess the main point I would like to make, today each and everyone of us has the ability to design and live the lifestyle that makes us happy.
Arrr.
CaptRobLee
16. April 2010 at 11:02 am
In addition, my Lifestyle Design model is based on what many know as ~ The Mexican Fisherman story (written by my friend Dr. Mark Albion).
16. April 2010 at 10:56 am
It’s been a little over a year since I made the decision to succeed as an entrepreneur. Along the way, I’ve made the first three mistakes (without actually realizing it), and probably money more.
I think a lot of people don’t realize how much that “time in the saddle” matters. Someone who has worked salary for years (decades) at one thing, still needs to go through the same painful processes that the kid who started out selling golf balls went through.
Age doesn’t have a lot to do with it.
I’m sure to make many more mistakes, most likely of the “OMG?! What’s he thinking?!” variety.
So, thanks for the encouragement early on, and for this great series of articles since then.
And it turns out I do have a lending club account, just haven’t ever used it, your results are encouraging.
20. April 2010 at 11:43 am
Thanks, Dave. It’s been great to watch your progress over the past several months, as well! I’ve made some silly mistakes even recently. It’s part of the learning process. The only thing that matters is getting through them and then putting processes in place to make sure those mistakes don’t happen again.
16. April 2010 at 11:30 am
Erica,
I love this post! It’s everything I needed to hear right now. On top of that it’s checklist friendly (or as some people like to say, actionable).
I think it’s great that we have the “lifestyle design” dilemma these days. Our parents’ generation (or your grandparents’) didn’t have to deal with this because there weren’t as many choices. Work from home? You mean be a farmer? That was about it.
I appreciate your insights and the way you break things down for beginners. It may not work for everyone but I’m sure there are a lot of people like me who are grateful for it.
Keep ‘em coming.
16. April 2010 at 11:44 am
Siddhartha so true about “lifestyle design” potentially being a dilemma due to the curse of too many options. With so many possibilities out there it is sometimes hard to know just where to get started. Like when I have to clean out my office after tax season but have to spend a half hour watching soccer highlight videos on YouTube first because its so damn overwhelming I can’t even get started.
16. April 2010 at 11:48 am
Also Erica, Lending Club needs a better landing page because you’ve got me intrigued but when I follow the link I don’t find any more information. Buena suerte en aprender el español!
20. April 2010 at 11:44 am
Thanks. I’ll pass that feedback on. In the meantime, I encourage you to sign up anyway. It’s a great way to earn passive income.
16. April 2010 at 2:54 pm
Stage One and Two are where many who read the 4 Hour WorkWeek never get to. I also love what you said about watching your money and being frugal. Erica, I loved the GTD notebook video you put together. Could you put a similar video together showing how you track finances (of course you don’t need to show your millions on the video). I think that would be a very popular video! Also, are you a ‘cash only’ spender. I think that’s a key to spending frugally.
20. April 2010 at 11:44 am
Hi Steve,
I already did
http://www.getrichslowly.org/blog/2009/02/05/the-ten-minute-budget/
This video is older, but I still use the same method today.
16. April 2010 at 3:05 pm
I totally agree with the thought that most of us think we can get away with not paying attention to where our money goes… and then we all think we can jump right to the part where we “get” to retire.
How “putting the cart before the horse” is that?
Dan
Casual Kitchen
16. April 2010 at 3:24 pm
Hi Erica,
Awesome post! This is the cold (well not so cold), hard truth that so many who have the get-rich-quick mentality need to hear. I am an entrepreneur who, like many others who work for themselves, have and still do work my rear end off. Focus and tons of persistent massive action is what pays off.
Thanks!
David
16. April 2010 at 3:35 pm
Erica
Great post but I would add what ever business you start, grow or sell make sure its soemthing you are passionate about. Clients and potetential clients will pick up on that right away.
16. April 2010 at 5:37 pm
Thanks for another enlightening post, I keep reading about Tim Ferris’s 4 Hour work week and read the success stories about people who are travelling the world whilst following this plan of attack, however no one ever seems to talk about the down sides and the real “Work” involved! There’s always a reality to every rose tinted vision and your post has shown that reality very well!
I agree you have to track your spending, I got so sick of getting to the end of the month and wondering how 300 to 600 dollars managed to disappear from my bank account that I started writing down everything I spend and checking it against my bank statement. Now I actually use a program called “Spend” on my iPhone and having it on my phone and with me all the time certainly makes the process easier. I’ve written about it here http://bit.ly/cXcCAY
I read in the book “Rich Dad Poor Dad” that the Rich Dad never spend much on his house and invested all his money into his business, nor did he get tied into a mortgage, Sadly in the Australia, owning your own house and the mortgage that comes with it seems to be the great Australian dream. I’d rather live where I want and pay rent than get tied into something I’ll be paying off probably until I’m retired (Australia has some of the highest house prices in the world compared to Australians yearly salaries, it’s about 10 to 15 times the average Australians yearly earnings!). I think your comments validate that choice a little.
16. April 2010 at 5:40 pm
Also I checked out Lending Club. I am guessing there would be restrictions on who can use it (Due to Taxes etc.), do you know at all if there’s an equivalent program in Australia?
16. April 2010 at 10:05 pm
Hi Erica,
One of those days I’ll have to read the book everybody’s talking about.
I’d say that most people who go into business to be able to design their lifestyle end up working much harder than they ever worked before.
Most small businesses end up needing their founder to be around if not, as in many cases, doing the actual work.
I think that saleability is very important but not that easy to achieve.
To get a business of the ground requires major commitment, effort and endless hours of work.
You touched on or covered just about everything in your post.
Vance
18. April 2010 at 1:38 pm
All you have to do is start with the end in mind and accept the fact that you can and will change the plan… only if you have a plan to start with!
19. April 2010 at 1:35 am
Congratulation erica, you cannot often see so clever writen ad for any busines. Wish you good busines with lendingclub.
What I like most on 4HWW is evidence of turn from business to showbusiness, done by Tim and You also.
That is the real way to multiple income most easily without much troubles. Not the easy way but real way. Leading normal business (eshop in Tims case and web company in your case) is much more exhaustive than writing.
20. April 2010 at 11:46 am
I didn’t start this post intending to write about Lending Club. However, several people have emailed me asking how my investment is doing, and I wanted to write about that. I really couldn’t justify a whole post about it, so I stuck it in this one. I felt it fit well with living frugally and the “dream” of passive income.
Thanks for reading!
19. April 2010 at 3:24 am
Nice post. I came here through a reccommendation from @brenthodgson on Twitter. Glad he gave it.
I think many of the posters in the replies have their heads screwed on right. The hard work part is what most people miss. However if you love what you are doing then it doesn’t really seem like work of course. That 4HWW goal would leave me bored anyway as I cannot pop off around the World at the drop of a hat due to the family.
20. April 2010 at 11:47 am
Yeah, I’m not the “travel around the world” type either. I like living in one beautiful place and making a home here. I enjoy traveling, and probably travel more than the average American, but I’m no Chris Guillebeau.
Whatever makes you happy!
-Erica
19. April 2010 at 6:18 am
Sensible.
Thanks for making this blog truly global, the rule remains unchanged the world over.
21. April 2010 at 2:18 pm
THANK YOU for the Lending Club lead. I’ve never heard of anything like it, except kiva.org which lends to third world country borrowers to begin their small businesses.
You’re wonderful as always!
Miss Rose
rosebark.blogspot.com