If we take “financial independence” to mean “being able to do whatever you want without money being a concern”, then the equation is very simple:
You’re financially independent as soon as your monthly passive income from assets exceeds the monthly cost of doing whatever you want.
This is the essential logic of the early retirement movement: save like crazy to buy assets, then quit once the expected return of those assets gives you enough to live on. It means the money you need to live keeps automatically rolling in, whether you’re working on a project, relaxing on a beach, or wasting time doing one of those “Which root vegetable are you?” quizzes on Facebook.
It makes absolute sense, and there’s just one drawback: you need to buy a lot of assets to give you a decent income. To make an annual income of $45,000 at a “safe” withdrawal rate of 3%, you’d need to have $1.5m invested before you quit. It can be done, of course – most things can – but the economic system isn’t set up to make it easy for the average person to achieve.
Luckily, it’s easier now than at any point in history to create assets out of thin air and find an audience for them. You can’t magic up a buy-to-let property or a share of a Fortune 500 company, but there’s plenty you can bring into existence with nothing more than your own time and skill.
Books. Digital products. Software. Apps. Services that are automated or delivered by someone other than you. In all these cases you can build it once, put it out to the global market, and get paid over and over again.
Unfortunately, though, the modern world is also set up to systematically relieve you of your free time without leaving you with much to show for it. So to actually create those assets, you need to borrow another concept from personal finance.
A core lesson in the book Rich Dad Poor Dad is “paying yourself first” – automatically transferring money to a savings account as soon as you get paid, rather than just saving whatever’s left at the end of the month. The point is you’re giving priority to saving for the future over your current needs and wants – taking care of it before life finds other uses for your cash.
In exactly the same way, I recommend you create for yourself first: every day, put in a solid couple of hours of packaging up your knowledge in a book or coding your app before starting work for someone else.
I did this last summer. Despite having a business to run, I spent the first two hours of each morning writing. A couple of months later, I had the first draft of a book. Last week, I started work an hour earlier than usual each day so I could record the audiobook. Both will come out next week – and, all being well, will be profitable assets for a good few years.
The difference between “creating for yourself first” and “creating in the time left over” over a couple of years could easily be the difference between being wealthy or not, working for someone else or yourself, living in fear of being laid off or happy to deal with whatever comes your way.
It’s not easy, but the time is better for makers now than ever before – and anyone can be a maker if they first carve out the time, and acquire the knowledge, to build creative assets.
p.s. The other implication of the financial independence equation is that you can also get there more quickly by reducing the cost of doing whatever you want. Minimalism (buying less), location independence (moving somewhere cheaper) and some branches of philosophy (the art of wanting what you’ve already got) are also handy shortcuts to getting out of the rat race.