The 8 Phases to financial independence

Financial 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, their children.

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 discretely celebrate.

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.

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