Focus On This Instead Of Trying To Get Rich
What we’ve been taught about wealth is wrong. When I was a kid, I always thought that you needed to be rich in order to do whatever you want. I internalized the thoughts and logic of people who were just living from paycheck to paycheck.
Over the past ten years of working, making, and spending my own money, I’ve come to realize that it’s not about how much you can make, but how long your financial runway is.
What is a financial runway?
A financial runway is how long you can go without having an income. I first came across the idea in Dave Ramsey’s Total Money Makeover.
For example, if you’ve got $10,000 in the bank and your weekly cost of living is $500, then you’ve got 20 weeks of freedom.
When you’ve got debt, that financial runway gets shortened. If your debt to asset ratio is negative, then you haven’t got a runway at all. The only exception to this idea is a mortgage.
Because paying off a mortgage is almost like paying rent — but slightly higher and with more financial obligations. But that’s a different kind of discussion.
The point is, if you’ve got a long financial runway, then you’ve got more freedom than a person who has none or much less. It gives you more options to figure things out when your income gets cut — it might be through job loss or major life changes like having a baby or moving to a different city.
The idea of retirement is that you work up until you reach your mid to late 60s, stop working, collect your pension, and live happily ever after.
However, as governments struggle to financially sustain the concept of a pension in general, our happily ever after in about 40 to 50 year’s time might no longer exist.
Maybe of us are opting for ways to get our happily ever after now — and to do that we need to figure out how to create a financial runway that eventually pays for itself.
This is where the idea of investing comes in.
Leaving your money to sit in your savings account doesn’t pay as much as it used to. With interest rates so low, it’s as good as having cash on hand. Long term investment funds tend to have an average return of around 8% over a 10 year period. But that’s a long term thing. This means you put your money in it and forget about it for a decade or two.
Having cash isn’t a bad thing.
The point of a financial runway is that it’s also your guaranteed insurance policy. There are no fine print, caveats, excess, or clauses. But it also needs to be flexible enough to cover you when there’s no income, or when your car breaks down, your toilet clogs up, or your radiator breaks in the middle of winter.
Having cash can cover these things.
Steps to building your financial runway
In Dave Ramsey’s baby steps, he emphasizes the need for an emergency fund. That is the first plank in your financial runway.
The second step is to pay off your debt. While credit scores can help you negotiate a better mortgage rate, there’s not going to be a mortgage if you can’t save and most of your income is tied to paying off debt.
You can still have a credit card but it’s about being responsible with it. This means spending within your income bracket. For me, I put almost everything on my credit card but I have a personal rule — if I can’t pay for it in cash, then I can’t afford it.
The third step is building up your cash runway. Dave Ramsey calls it a ‘fully-funded emergency fund’.
For content creators, freelancers, and self-employed contractors, having this fund is crucial, especially if your income fluctuates. The length of your financial runway determines how long you can maintain your current lifestyle without having to worry about money.
The length of your cash runway depends on your comfort level. The general length tends to range from 6 months to a year.
Once you’ve got a runway that’s comfortably long for you, then it makes sense to start looking into investing.
Freedom, happiness, and a sense of fulfillment are complementary
The idea of retirement is tied to the idea of freedom. However, retirement is not the only pathway to freedom.
Getting rich and getting rich quickly is something that everyone wants but is a rare occurrence. You might win the lottery but the odds are generally stacked against you.
You could spend an entire lifetime buying lottery tickets and never win a major prize. Your pension is guaranteed today but not tomorrow. Having your own money is the thing that will definitely grant you the freedom you want.
But you don’t have to wait years for it to materialize. You can start today and work your way into freedom with a financial runway. Most people start to experience the psychological benefits once they get rid of all their debt and have a few months of expenses finally saved up.
Once you have that figured out, making more money and unlocking the secrets to building wealth becomes much easier. It won’t make you rich overnight but it will help you become free from long-term financial worries.