This is the formula for financial independenceDec 06, 2019
It doesn’t matter how much – or little – you earn, the formula for financial success remains the same.
That is, spend less than you earn and invest the difference.
Very simple, yet so often ignored.
The great Jim Rohn took this a little further, suggesting that you should spend no more than 70% of your after-tax income.
Assuming you can adjust your spending patterns to manage that, what to do with the rest?
10% should go to charitable or good causes, said Rohn.
At least 10% of your income (or ideally more) should be diverted into passive investments, such as into stocks or well-located real estate, to benefit from the power of compound interest.
And another 10% of your income should be put to work actively, in a business venture or project, for profit.
Profits will always be more powerful wages.
That’s partly due to the tax system, but also because profits can be scaleable (whereas employment generally involves trading your time for income).
Profits also don’t care what age you are – it’s not like employment law, where you can only begin work at a certain age – you can make a profit doing anything at any time.
If you follow this formula and you’re smart, then compound interest should get you to financial independence in about 15 years, even if you’re starting from a low base.
Of course, if you can increase your saving rate or experience a business success then the timeframe could be much shorter.
I discussed this a little further in the short video here
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