We make a classic mistake in our early financial lives where we burden ourselves with enough debt and enough commitments that our whole focus is narrowed towards fulfilling such commitments and while climbing the career ladder. We forget to consider if there is another way of living a good life.
I am not too old but I can confidently say that I have been a proponent of financial freedom all my life. The naive view about financial freedom is that it will want you to retire, rot at home drifting aimlessly through life. I am told that you will be left without goals and commitments.
While I do not want to make a point, we must understand that there is a reason behind the financial freedom movement. We (puny humans) started noticing that we were living a life of indentured servititude . The life where you wake up in the morning, run the hedonic treadmill and start again the morning.
The whole world is on this treadmill. Some are going slow and some are leaders in this race. We know that there is a way out of this race but aren’t doing anything about it. I see two possible options to get out of the race. One, you quit everything and immediately start doing what you love and try to make a living out of that. This option is hard. Not every one can publish a popular book or write a hit song. No one will like it too. You will be called an idiot which may be more stressful than your current job. There is another way out. The second option. It is to work towards financial freedom in your current job.
You must realise that financial freedom is an optionality. Once you are through this, a lot of other gates open in life. Your future self will thank you for creating this option.
Hold on, what is optionality?
The optionality approach is nothing but a way of creating your own luck, making sure that the upside is enormous while down side is capped. You create options in life where the downside is capped but the upside could be unlimited. For example, by using the barbell approach to investing, you can limit your downside or the risk of ruin by investing 80%-90% of your wealth in instruments like bonds and diversified indices. With the rest of the 10%, you can take risks by investing in startups or cryptocurrency or any other fad which has a small probability of giving you enormous returns. You have capped your downside by investing major wealth in safer instruments while you have opened yourself for a large upside by taking risk with a very small portion of your net worth. When you apply the model of optionality to financial freedom, you are basically freeing yourself from committing to one employer or one job for life. You are freeing yourself from a monthly pay check. Financial freedom is the single most powerful way of opening up options in life.
How do you achieve financial freedom?
The formulae is simple. You want to accumulate money to last a life time or at-least a few decades. I say a few decades because this will allow you to figure out what you enjoy doing and how you can make a living out of it (use the financial freedom calculator to figure out your number). You can achieve the required corpus quickly if you can figure out how to increase your income and keep your expenses low. The combination of a big bank balance and frugality can be a game changer. It can buy you enough freedom for life.
If you are wondering how much is enough, this is something that requires deliberation from your end. You have to decide. You could cover the basics like food, shelter, sleep, meaningful work, insurance, education, pleasure or you could inch up your requirement to cover all sorts of hedonistic pleasures and material things. Bill Gates once said “I can understand wanting to have millions of dollars… but once you get much beyond that, I have to tell you, it’s the same hamburger.”
In the initial years, you must focus on two key metrics to achieving financial freedom early. They are net-worth and expense ratio. The higher your net-worth, the better will be your position in life to take advantage of opportunities. The lower your expense ratio, the more resilient you will be to black-swan and unexpected events in life.
My first exercise for you is to use the net-worth calculator and figure out your net-worth. This is your bullshit detector. Tell as many lies you want to the outside world, but do not fool yourself. If your net-worth is positive, congratulations, you are at-least better than a majority of the population. If it’s negative, you must set yourself on a path to improve it.
Next, take time and fill in the required details in the sheet to figure out your expenses to income ratio. A higher ratio is a signal that you are not conscious about your expenses and that you take money for granted. Take some time to figure out what is absolutely essential and what is luxury. Only you know the things you absolutely must have. If you are completely honest with yourself, you’ll understand that most material things are absolutely optional in life. You only need essentials for life. Everything else is just luxury.
What happens when money is one less thing to worry about in life?
Once you have figured that you have enough money and stop running on the hedonic treadmill, you can turn your attention to finer aspects of life. You will spend more qualitative time with your children, you will appreciate travelling, may be you will learn to cook, or to play a musical instrument. More importantly, you will learn to take life slowly, do one thing at a time, without stress and negative influences. Financial freedom is a great shot at buying happiness.
One thing you must understand that money is just one aspect of a good life. Things like time, health, energy, worship, family, meaning and anything that is important to you also forms a part of the circle of life.
If you are someone who wants to learn more about personal finance and figure out how to think about money, check out Turtle Money Circle.