independence should be a goal of every entrepreneur. Achieving financial
independence, one responsibility of family-men worldwide, is undoubtedly
laudable. It offers his family protection and obviates the need for
government to do this job for him at a great saving to taxpayers. It
creates opportunities for his children and, depending on its extent,
I say ‘one responsibility’ knowingly. You are already familiar with my terms ‘provider’, ‘literate parent’, ‘financial attainment’ and ‘male breadwinner.’
You appreciate that I regard these ideas as equal to or of greater
status than the process of obtaining money. (For more on this, see
previous articles under Providing). Many would disagree.
Before I do though, it should not surprise you to discover I am
actually not interested in money. Money, in and of itself, offers not a
gram of motivation for me. What one can do with money: yes. Not money
for money’s sake and I suspect most entrepreneurs are the same. It is a
common misconception that entrepreneurs are driven by money. Being an
entrepreneur and knowing countless, I can say with certainty that what
makes entrepreneurs tick are independence, freedom, opportunity,
creativity, competitive spirit and adventure. Money is a scorecard,
nothing more. Of course, if rewards flow from the exercise of these
attributes, this is a nice consequence but not the main motivation.
We cannot get away from the fact though that money is a great
enabler. Studying how money is acquired is therefore worth scrutiny.
There are eight phases in the journey towards financial independence,
each remarkably straightforward to describe. Here they are in short:
• Phase 1 – Play the right game
• Phase 2 – Get a job
• Phase 3 – Save and measure
• Phase 4 – Jump
• Phase 5 – Milk the cash cow
• Phase 6 – From profit to investment
• Phase 7 – Reinvest passive income
• Phase 8 – Celebrate
Let’s scrutinise each.
Phase 1 – Play the right game
You can obtain a fortune one of seven ways. Having a regular job is not
one of them. The seven are inheritance, business, film, fashion, sport,
gambling and theft. If you are thinking of the latter two, please see a
therapist. You will be caught hitting the casino and robbing the local
bank! If you do not inherit money, athletic DNA, movie-star talent or
supermodel looks, business is best. Most people ignore all seven, play
it safe and take a regular job. This conventional wisdom is the wrong
game to play for financial independence. You need a money-machine, a
cash-cow, and business seems most logical. But you have no money to
start one. So, what next?
Phase 2 – Get a job
The grim realisation sets-in that you have to do what everyone else
does: get a job. Of course, you will secure a better paid, more
autonomous role with better education. Hopefully you had literate
parents who were zealots about your education. Their legacy, as will
yours with your children, has an intergenerational impact. And your
experience in the workplace is vital. You need to plan a
pre-entrepreneurial career, a carefully constructed series of roles
which together develop a focused, cohesive expertise. Ideally, do this
in an industry you love and can later enter as a businessman. Most
people (Australia: 95%, United States: 92%) find a job. Of these, only a
quarter have careers.
Phase 3 – Save and measure
Next, save. This means earn as much as possible whilst living frugally.
The best time to save is while still living at home or, if this is not
possible, prior to marriage and children. In both stages of life,
expenses are minimal. Attempting an aggressive savings programme whilst
servicing serious commitments – family, mortgage – is impossibly hard
for most salary-earners. Start early. Investment bankers, private equity
professionals, hedge fund managers, medical specialists, equity
partners of big law firms and large-cap public company CEOs have the
advantage of high incomes, so saving is easier. Regardless of your path,
measuring personal income and expenditure is important. It is a
fantastic early life-habit to engage a bookkeeper and maintain personal
accounts. You have a better chance of controlling your spending and
saving if you see your stark numbers. Only 10% of people save, and then
only modestly. 2% of people keep properly maintained personal accounts.
Phase 4 – Jump
In time, you gain valuable commercial experience and squirrel away some
savings. Next, you write a business plan built around that experience
and money. If done properly, you could be shocked to discover exactly
how much cash you need to launch an enterprise. Perhaps more time is
needed to save. Perhaps a scaled-down version of the proposed business
is required. Perhaps other sources of capital are possible. In addition,
you now have your personal P&L maintained over several years and
have an honest picture of your personal living expenses. Your personal
cash requirements and that of your proposed business begin to percolate.
You visualise a transition and realise the vast emotional dimension to
this: can you stomach the risk, can you tolerate the ambiguity? Even if
you are in that small minority who reach this stage, only a tiny
fraction actually jumps. On quitting your job, so ends the safety of
your employed career and the uncertainty of business life begins.
Phase 5 – Milk the cash cow
This is your real start line. Everything to date has been about having
the opportunity to build your own money-machine. Whether you can
successfully build one remains to be seen. Fear of the unknown
immediately evaporates with countless problems and challenges. One of
the biggest learning curves for you is that running a business, of which
you have no experience, and producing the product of that business,
which you have done before, are not the same. You discover there are
thirteen business disciplines (see the Business section
of this website with advice on a myriad of commonly-occurring
challenges) and you are completely green. Your first years are
precarious. You adapt, adjust, learn. You tinker with your operation and
perhaps even overcome inevitable mistakes. You gain the fastest
education of your life. You learn things about yourself you never knew,
about business and about people. In time, hopefully and with grit, the
start-up emerges to something which yields a modest profit and perhaps
these will even grow. You quarantine sufficient reserves to ensure your
business has adequate capital, a cash buffer to protect it from nasty
fluctuations. Then finally, you start to squirrel away money above this
base. You now have that money-machine, a cash cow to milk. And it dawns
on you that this is better than eking out scant savings from your
salary. Only 14% of people going into business reach this stage.
Phase 6 – From profit to investment
With your business bubbling away, you have this cash stockpile but don’t
know what to do with it. You ask your family, maybe a trusted friend.
Perhaps you are seduced by a hot tip from a friend of a friend. At
first, you indulge your natural tendency: at the conservative extreme,
subsisting in a kind of investment paralysis due to fear and
inexperience, to the tempestuous extreme, throwing money
indiscriminately at sub investment-grade opportunities and seeing what
sticks. In time, you learn to master your fears, check your exuberance
and spot the charlatan. You enter the world of investment-grade bonds
and shares, invest gradually and begin to harvest interest and dividends
as passive income.
Phase 7 – Reinvest passive income
Time passes and you are disciplined about adding more business profits
to a growing investment portfolio. And when your investments produce
interest and dividends, you pour these returns into further investments
of the same quality. You resist all temptation to spend the returns
because you know this will slow your progress to financial independence.
These compound returns and further profits from your own business
accelerate the growth of your investment portfolio. You are building
your own personal safety net.
Phase 8 – Celebrate
You are now well-practised in measuring financial performance,
personally with living expenses, with your business and your
investments. You keep a keen eye on your monthly passive after-tax
income, that is the figure generated from investments not your business.
You know your actual and anticipated monthly living expenses. You know
that your monthly passive after-tax income as a percentage of your
anticipated monthly living expenses is your measure of financial
independence. So, when that figure reaches 100% or more for twelve
consecutive months, you implicitly appreciate that you are financially
independent. Your labour is not required to earn a living. You and your
wife are safe baring an exceptional calamity. It is at this moment, you
Now, some people never think about Phase 1. And because others are born to parents who do not value education, they fail to reach Phase 2. The majority never achieve Phase 3 but, even if they do, are rarely endowed emotionally to cope with Phase 4. The timeline from Phase 5 to Phase 8 is never quick. When it is, we are talking in a span of years. Most who enter Phase 5 never reach Phase 8. In fact, Phase 8 is a wonderful lifetime achievement. The über-successful at this game are those who achieve financial independence, not just for themselves but for their children and subsequent generations too.
The body of work on this website is dedicated to all dimensions of this process. The Business
section offers countless case studies, histories and advisories about
how to start and build cash-yielding, autonomous businesses. The Investing section, without offering advice, reveals what I’ve done with my profits. The Providing section comments on values surrounding the use of money and what money enables. The Politics section advocates policies which help people on this journey.
For your path on this journey, I wish you well.