Financial IndependenceMake Your Own Opportunities
Setting your goals, taking responsibility and most importantly, taking action when it comes to personal finances to build wealth and create your future.
What is Financial Independence?
And how do you get there?
Everyone has a different idea of what the concept of being financially independent means, along with what it actually takes to get there. For me, ‘Financial Independence’ is reached once you have the ability to choose how you spend 100% of your time while maintaining your lifestyle expenses through passive income.
This is why turning to a collective power (like a Government) to provide us financial independence has never worked. We’re all different and everyone has different needs. You cannot be financially independent by relying on a system of dependence, like the Age Pension.
It is the feeling of independence that we’re striving for and which underpins this whole concept. Independence is the thing that people are wanting… but most of the time the focus is solely on “finance”. Your finances, or investments, are just a tool that you use to support that independence. However, if you don’t know what your independence looks like, it becomes almost impossible to set a target on how much passive income you will need
The great thing about society and in fact reality, is you can actually negotiate with the future. You can control the future if you just put a plan in place to get there in the present. You negotiate with the “now”, you set a plan into action and become determined on a better outcome for your future. If you want to achieve financial independence in a certain amount of time, then work out what you’re going to do now to achieve it. Alternatively, you could just ignore this… and see where you end up in the future as like it or not, you can’t stop time ticking away.
Personally, the concept of Financial Independence really resonates with me, and employ this approach myself to avoid ‘hedonic adaptation’ creeping in. According to this theory, as a person makes more money, expectations and desires rise in tandem, resulting in no permanent gain in happiness. Since one must continually work to maintain a certain level of happiness above a normal baseline, this is often referred to as the ‘hedonic treadmill’. I set a base living standard and then invest everything I earn on top of this figure.
Whilst I was a PAYG employee (a little while ago now), I was saving between 50-60% of my income and investing it, with a decent chunk being salary sacrificed. The process of setting up a new business put a dint in the ability to save, but I worked to get back to that level. I always reinvest income from investments, which starts to make up a larger component of your income to the point it can fully replace what you earn from employment.
What are some tips to get off the hedonic treadmill and start running towards financial freedom?
Keep things simple
It is hard to get to the point where you’re saving and/or investing the majority of your income. With a few simple finance ‘hacks’ though, you can start working in the right direction. It starts with, ‘How to not care about what I have, or how I relate to others’.
Learn the true value money
Spending habits can be greatly influenced by two key neurotransmitters in the brain, Dopamine (our reward system), and Serotonin (linked to social status). Buying things is an extremely easy way to get a hit of these brain chemicals that don’t just feel good, they influence the circuitry in our brains. It can be a slippery slope though, with more and more spending required in order to maintain the same base line. A bigger house, better car, a new outfit, or the newest iPhone, is spending money for another dopamine or serotonin hit.
We can use this knowledge to our advantage though, and rather that spend our money on non-appreciative assets (things that aren’t going to gain value in the long term or provide an income) we can relearn how our relationship with money from this perspective, disassociate these factors from money itself, and finally get off the endless treadmill!
This of course can be a bit hard to start with because if you’ve constantly spent money on hits of dopamine it’s hard to unwire.
Another way in which we get this same dopamine hit is by achieving goals. Rather than buying ‘stuff’ with money, we can invest those funds or put them towards a savings target that will benefit our future. This is clearly not as ‘sexy’ as buying a shinier car or the latest gadget. There isn’t the same reward system activated in the brain initially, because shares, investments or savings aren’t tangible.
But, if you focus on your monthly savings or investment target, you get your hit of dopamine when you do eventually achieve it. In this way, dopamine is really the easier of the two neurotransmitters to rewire. Serotonin is harder to do. It does require a bit more self-confidence and self-esteem. If you’re constantly looking at what other people have, and trying to keep up, you’ll always be unhappy – there is always someone else with more.
Instead, having a deeply engrained sense of self-worth means you’re not constantly chasing something, or letting things you own define you. This is why you can never really tell who has real wealth just by looking at them (or if it that so called ‘wealth’ is funded through debt and cashflow!)
What you can do
- Turn it into a game;You could even think of it as tricking people, in a low key kinda way. Not dressing in the latest, most expensive gear… but instead, secretly making yourself wealthy. I met with a guy a little while ago who is extremely wealthy, he even owns a helicopter. But every time I saw him, he was in old sneakers, and an old t-shirt. He didn’t flash his wealth around or spend his money on conspicuous consumption.
- Understand and use ‘The Endowment Effect’, ‘Future Value’ and ‘Opportunity Cost’; People tend to put more value on what they already own, regardless of its objective market value. Use this to your advantage! Put a premium on every dollar that you already have and start valuing your money more. Here’s what you do; For essentials, like food, rent/mortgage, etc it’s pretty hard to attach a premium, however if you make some smarter choices you can cut this spending down. Do you really need to buy the pre-made meals, or can you make your own? For non-essentials spending, grossing this up by a factor really helps you to value your money more.
For example, a new TV is $3,000. The life of the TV is, for arguments sake, 10 years. If say, that $3,000 could have earned you 7% over the same timeframe, that $3,000 spend today is actually worth $6,000. Think about your spending in terms of future value, and what it’s costing you in the long run. Another way to think of it is, how much could I sell that $3,000 TV in 12 months? Maybe $1,800? $2,000? Is what you’re about to spend your money on going to go up in value? No? Then what else could you be doing with that $3,000? It’s better to invest your money in something now that will grow in value rather than buy something that will decrease in value. For every dollar that you spend today, in 10 years’ time could be worth twice as much if you invest it instead. To part with it that money, the item better be worth it!
So what’s the moral of the story?
You don’t have to live like a pauper – enjoy your life, and have great experiences. But next time you’re looking at a big splurge on something, gross up the value and see if it is still worth it!