A Better Pathway to Financial Freedom

Previously I have given my definition of FF (post 2), and suggested that any shortcuts to FF should be viewed with a good deal of caution (post 3). Get rich quick schemes cannot be rejected altogether. They are a valid pathway to FF but only for a small minority. But I do not believe they will be suitable for most people. I will describe here what I consider to be a better pathway to FF.

Once again I refer back to the waterfall diagram with the four basic money buckets. You might ask yourself : Which is the most important bucket you should focus on to achieve FF ?

This is a good question to stop and ponder. It might be impossible to answer categorically, as it will differ from person to person, but let’s have a crack nonetheless. I have already given my view it’s best to start at the top of the waterfall and not the bottom (i.e. Investing). But it’s more difficult to say which of the top two buckets is more important, Earning or Spending. There is an element of chicken and egg here, and I’m sure many would contend that Earning should be the first focus, as you can’t spend until you’ve earnt…  While there is some logic to this, if I had to pick the one most important bucket for FF it would be Spending. In the long run, the most important driver of FF is spending your money wisely with value in mind and avoiding the so-called “lifestyle creep” / materialistic culture that has become so pervasive.

Books such as the Millionaire Next Door have done an excellent job in making this point and revealing the common misconception that it takes money to make money. The Mr Money Moustache (MMM) blog is another excellent resource that focuses on Spending bucket as the critical priority. Think of it this way, the objective to the FF waterfall is to generate enough water to fill your Spending bucket. So the smaller you can make your Spending bucket, the easier this task becomes. I saw this quote recently which neatly sums it up : "How happy a person can be, is not how much one has but how little one needs...."  (source unknown)

We could also consider a sporting analogy and the well known cliché “Offense wins games but Defense wins championships”. Obviously both are essential, but when it comes to the crunch, controlling your Spending (i.e. Defense) is more critical than maximizing your Earning (i.e. Offense).

Now before you jump to the wrong conclusion, I am not necessarily advocating frugality, which might work for some but probably won’t be enjoyable or sustainable for most people.  I’ll repeat again what I said earlier : Spend money wisely with value in mind and avoiding “lifestyle creep”/materialism.

Close on the heels of Spending, the Earning bucket comes a very near second in the FF pecking order. By focusing on this bucket you can increase the flow from the very top of your waterfall. How can you do this ? Get a good education, prioritise your career, continually develop yourself, build a strong professional network, seek advice from a mentor, etc. These are the first ideas that spring to mind and I’m sure you can think of many more ways to sustainably grow your salary/wages. I will highlight the word sustainable. Please keep a long-term perspective and think very carefully before job hopping excessively or delivering ultimatums to your boss (e.g. I need at 10% payrise or I’ll have to leave and join XYZ company). Sometimes these short-term increases in Earning can compromise your long-term potential by damaging important relationships and even worse, your reputation.

I hope this post is relatively obvious and intuitive. Nothing from left field, just a very straightforward and logical approach :

1) manage/control your Spending

2) sustainably grow your Earning

è both of these actions result in more surplus money each month for your Saving and Investing

Over time your investments and active earning will continue to grow and compound interest will start to work its magic. You will need to fight hard against the temptation to increase your spending habits in line with the surplus funds at your disposal (“lifestyle creep”). And if you’re patient and consistent in following this simple recipe, you will definitely make big strides towards FF. It won’t happen in a few years or maybe not even a few decades, but it will happen eventually and much sooner than if you had not taken this “better pathway to FF”.