Most people have to work forever. It takes a special process to get off the hamster wheel of working to pay for an ever-increasing lifestyle.
Anyone can follow this process, but most won’t. There’s too much pressure from friends, family, advertisers, and society to stay on the hamster wheel.
I hope you’re different.
Work is good. Through the ingenuity of billions of people, we’ve created great advances in medicine and technology, we’ve built a safer modern world, and we’ve created a world in which there is the possibility of choosing to work.
But working just to buy more stuff we have to pay to maintain only to have to work even more to afford that maintenance is insanity. Yet that’s how most people live.
The Simple Equation
Financial freedom is simple: spend less than you make.
There are two parts to that equation: (1) earning level and (2) spending level. To improve your lifestyle, you need to adjust one or both variables. Also, how you earn money matters a lot if you want to be financially free…
The goal is to have your investments earn more than you spend on your lifestyle. If you make an income from a job or a business that exceeds your lifestyle, great; however, if you stop working, your income tanks and you then make less than you spend on your lifestyle.
Aim to build sustainable, long-term investments that produce enough income to exceed a reasonable lifestyle for yourself and your family. However, income level isn’t all that matters…
A Better Equation
“Cash flow is king!”, shouted hundreds of “gurus” attempting to sell investment products in the past.
“Cash is trash!”, different, but similar, “gurus” shout today in an inflationary environment as they try to sell you new investment products (aka, “opportunities”).
Is cash flow or appreciation more important for an investment?
Neither is more important. What matters is the after-tax economic value you can derive from that investment.
Whenever someone irrationally says your investment must produce significant cash flow or it’s not “real”, ignore them. Most of the wealth of the richest people in the world, like Warren Buffett, has come from the appreciation of assets, usually businesses, from reinvested earnings, not cash flow paid out to investors.
Don’t be fooled by people telling you cash flow is all that matters in an investment. A good tip to see where their motivations lie is to see if they want to sell you an interest in a cash-producing opportunity. If so, run.
Understanding this principle, how much do we need for a lifetime of wealth?
The 4% Rule
In the 1990’s, three finance professors in Southern California studied historical stock and bond returns to determine a safe withdrawal rate. They concluded that, for the period studied, it was safe to withdraw up to four percent per year for at least 30 years.
As with anything concerning the stock market, this study has been debated. Is 4% too high? Is it too conservative? What if the stock market is down this year? Or up? Why don’t you quit worrying about the stock market and buy my “special” investment instead? Or, please put money into the thing that I’ve already dumped a bunch of money into and have no way to get out of!
The four percent rule gives us a benchmark.
It is generally safe to assume that if you can spend less than 4% of your portfolio allocated to an S&P 500 index fund and maybe some bonds, you’ll be safe.
If you have a $1 million portfolio, as long as you spend less than $40,000 per year, you’re set for life. If you have a $2 million portfolio, you can bump your lifestyle up to $80,000. Or, if you can figure out how to live off only $20,000 per year, you only need a $500,000 portfolio.
Great, so how do you get there?
Aim to Spend Less
No matter how much money you make, there will be ways to spend every last dime.
To someone who makes $10,000 per year, buying a million dollar house may seem crazy. To someone who makes $250,000 per year, buying a $20 million house may seem crazy. To someone who makes $50 million per year, buying a $125 million house seems reasonable.
Jeff Bezos, Founder of Amazon, sold a billion dollars per year in stock to fund his space company, Blue Origin. No matter your wealth or income, you can spend it.
Therefore, the first step is to control your spending. You must spend less than you make or you’ll never be financially free, regardless of how much you make.
Every dollar you spend can’t be invested to help you achieve financial freedom faster. The saying “the rich get richer” exists because the rich have money to invest.
We all have 24 hours in a day. To get off the hamster wheel, we need our money working for us. The only way to accomplish this is to actually have money set aside to invest.
Let’s say you figure out how to make $150,000 per year after-tax from a job or business and limit your lifestyle expenses to only $50,000 per year for ten years. In this simplified example, you have $100,000 to invest every year.
The historical return of the S&P 500 is around 10%. After 10 years, assuming you invest the $100,000 in equal monthly amounts, you will have over $1.5 million in your portfolio.
Using the 4% rule, you could likely never work another day in your life as long as you spend less than $60,000 per year.
But most people don’t want to completely stop working…even better!
Increase Your Income
To increase your income to build your investment portfolio faster, I’m biased toward starting businesses, specifically online-focused businesses.
I’ve personally built multiple businesses in e-commerce, software, and online education. Any of those options work. They all require little upfront capital and have the potential for high-growth.
Whether you increase your income from a job or starting a business, the more you make, the faster you can never have to work again (assuming you’re not spending every dollar that comes your way).
Once you build a sizable portfolio, you will likely want to keep making money. Every single person I know who has made enough money to retire and keeps their lifestyle spending reasonable, still wants to work.
We’re built to produce and share. It feels better to be productive.
But, the difference is you don’t have to work. You choose what you do and how you do it.
You have complete freedom and you feel a sense of meaning in your life. You get the best of both worlds. Plus, you can increase your lifestyle spending if you want beyond the 4% rule because you’re making additional income from your chosen work.
The reason most people never get off the hamster wheel of required work is they spend too much. This applies to $1 million per year investment bankers and doctors just as well as $50,000 per year administrative assistants.
You can become financially free forever if you follow the simple principles laid out above.
To being different,