Focus on These 3 Numbers to Smash Your Money Goals This Year
#3: How much money you make doing work you love
Wealth as measured by your “net worth” is useless if it doesn’t buy you freedom.
A better measure of “wealth” is how much money you have relative to your cost of living. $1 million to somebody who spends $30,000 a year is life-changing. $1 million to someone who spends $300,000 per year is nothing but a nice cushion.
I’ve written a lot about my personal definition of financial freedom, which is spending your days doing work that you love without worrying about how you will pay the bills.
Okay, I’ve actually written an entire book about that definition of financial freedom (shameless book plug!)
I mention the book because its title, “The Financial Freedom Equation,” tells us which financial numbers we must focus on to achieve financial freedom.
Here’s the Financial Freedom Equation:
Financial Freedom = (Passive income + income from work you love) > Your living expenses
Today, I’ll show you why the following three numbers are the key to solving the financial freedom equation.
Passive income from investments.
Your annual cost of living.
How much money you make doing work you love.
#1 — Passive income
The only true source of passive income comes from investment income.
Dividends and capital gains from stocks.
Interest earned from bonds.
Rent collected from real estate.
If you could cover your living expenses with passive investment income, you would have reached the ultimate level of financial security where you can literally do nothing and never have to worry about paying the bills.
However, as I pointed out in my most viewed article of all time, it takes most people a lifetime to build an investment portfolio large enough to cover their living expenses.
Here’s the golden rule about passive income.
If you want passive income in the future, you must focus on increasing your savings rate today.
Your savings rate refers to the percentage of your paycheck you save and invest.
The higher your savings rate, the more money you’ll be saving relative to your monthly living expenses. This point is key because it’s not the amount of passive income you generate that matters; it’s the amount of passive income relative to your living expenses.
Here’s a 5-minute dedicated discussion on the importance of your savings rate.
#2 — Keeping your cost of living in check
Unlike passive income, maintaining a reasonable cost of living is something you can have an immediate impact on.
I can’t stress enough how important it is to keep your cost of living to as low a number as you can when pursuing financial freedom.
Every dollar you lower your cost of living by is a dollar that does not need to be replaced by passive income or by doing work that you love.
A low cost of living is what makes financial freedom possible for people making a modest income. Think of it as your secret financial weapon. It’s the edge you have over people with a high income but a high burn rate to match it.
If you want to lower your cost of living, the first place to start is with your “big 3” living expenses;
Housing.
Transportation.
Food.
If you make smart decisions with your big 3 expenses, odds are your cost of living will not prevent you from reaching financial freedom.
In chapter 3 of the Financial Freedom equation, I discuss in detail how to reduce your big 3 expenses.
#3 — Earning money doing work you love
The biggest flaw of the Financial Independence, Retire Early (FIRE) movement is that it focuses on financial capital and does not focus on the most important investment you’ll ever own; You.
Your human capital, AKA your ability to earn money, is the most important investment in life, which is why it is so important to achieving financial freedom.
Many of us use our human capital to earn money working for someone else, doing work that we don’t care about. Many people pursuing FIRE will continue working jobs they don’t like for decades so that they can achieve enough financial capital to escape.
But if you could earn enough money to pay your bills doing projects you are passionate about and have complete control over, you would have financial freedom.
That doesn’t mean you should quit your job. The income from your job can provide financial security for you and your family. That is not something you should take for granted.
Instead of quitting your job, why not start a part-time business doing work you love. Start with a simple goal of earning enough from your side-business that you could replace 10% of your income from your 9–5 job after one year.
Then in your second year of running your side-business, aim to earn 20% of the income you earn from your 9–5 job.
If you keep going at that rate, you can put yourself on the fast track to financial freedom.
I call this the 10% rule to financial freedom (chapter 18 of my book)
If every year you can replace an additional 10% of your current income doing work you love, you can achieve financial freedom in no more than 10 years.
When you can cover all of your living expenses doing work you love, you have achieved financial freedom.
Financial freedom is not a mindset; it’s a math equation
You only need to focus on three variables to solve the equation;
Building passive investment income through a high savings rate.
Keeping your living expenses in check.
Slowly replacing the income from your 9–5 with a side-business doing work you love on your schedule.
If you take anything away from this discussion, let it be this; you are the key to financial freedom.
By unlocking your own brilliance and skills and deploying them towards making money doing work you love, financial freedom can be yours a lot sooner than you might think.
If this discussion has you excited to start building your financial freedom game plan, you might be interested in picking up a copy of my book here, where I expand on all these topics and more and help you build your blueprint to financial freedom.
One Last Thing…
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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.
Love the 10% increase each year idea. Genius.