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The Freedom Equation
In this video, I cover the Freedom Equation and the different variables that will determine the time it takes you to reach financial independence.
The goal here is to leave you thinking about money in respect to "time" and to narrow your focus on increasing your assets, reducing and controlling your monthly expenses while growing your passive income.
Let's start with defining the variables that make up this equation.
Assets (A)
Something you own that can quickly and simply be converted into cash while retaining its market value.
Assets include: cash on hand, checking/savings account, stocks, crypto and any other asset that can be quickly converted to cash.
On the other hand…
Real estate properties, cars, electronics, clothing and food among many other things are NOT liquid assets.
Rule Of Thumb
- Increasing your assets gets you closer to financial independence.
- Reducing your assets gets you further away from financial independence.
Goal - Increase your liquid assets.
Expenses (E)
The total amount of money required to sustain your lifestyle, every month.
Expenses include: utility bills, groceries, rent or mortgage payments, video-streaming services, car insurance, transportation, entertainment, etc.
Rule Of Thumb
- Fewer expenses helps you achieve financial independence faster.
- Greater amount of expenses slows the time to achieve financial independence.
Goal - Reduce and control your monthly expenses.
Passive Income (PI)
Income that isn’t correlated to your time input.
Passive income streams include: earnings from a rental property, returns from index funds, hedge funds, high-yield interest crypto accounts, farms, liquidity pools and business ventures where one is not actively involved (investor).
Rule Of Thumb
- More passive income gets you closer to financial independence.
- Less passive income gets you further away from financial independence.
Goal - Grow your passive income.
How To Calculate Your Freedom Numbers
Now let’s put the freedom equation into action so we can measure your current freedom with respect to time and money.
Tracking our freedom numbers is top of the list or else we won’t be able to measure our progress over time.
It will also give us a starting point to become aware of exactly where you stand.
(You won’t believe how some people have been going through life already ‘financially independent’ but didn’t know it, so they continued to stress about their finances)
We begin with freedom with respect to time.
This number will tell you how many months you can live comfortably if all your sources of income hit zero.
Since most people don’t have any passive income (PI), their time freedom is purely based on their ratio of liquid assets (A) to expenses (E).
Being able to buy about 2-4 weeks into the future because they are living paycheck to paycheck.
As your time-freedom figure grows, you create room to follow your soul’s calling which leads to living a more inspired life, rather than living in a state of survival.
Switching gears to freedom with respect to money.
This number will tell you how much extra passive income you must generate in order to reach financial independence.
As your money-freedom figure grows, your monthly expenses (E) will be covered by your passive income (PI).
And your feeling of independence is just that...
Directly correlated to the amount of time you can buy yourself with the passive streams you’ll grow.
On your journey you will earn more cash (A), you will create and grow your passive income (PI) and maintain or decrease your cost of living (E).
Notice how the single variable that we can attribute the most significant change to is passive income.
So regardless of how many assets you have or how much income you make....
You can still get caught up in the rat race!
Remember the ONLY variables we need to be paying attention to in order to accelerate our path to financial independence:
- Assets (A)
- Expenses (E)
- Passive Income (PI)
Those three variables can all be managed completely hands off by automating these two things: our savings and investments.
Savings increase our assets and allow us to spend (control expenses) completely guilt-free.
Investments increase our passive income and therefore contribute to the growth of our assets and overall wealth.
You must create systems because, the reality is, as human beings we cannot rely on ourselves or sheer willpower to get it done.
Build a system that is:
- Creating cash cushions from saving a percentage of your income
- Paying your bills for you
- Exponentially growing passive income while you sleep
For one, it’s going to save you a lot of invaluable time. This is the single resource we don’t get back.
And two, it will work like clockwork 100% of the time regardless of your physical or emotional state.
This section alone will put you in front of 99% of people.
Compounding these actions over your lifetime will lead you to experience and unlock your true earning potential.
To all my builders, I salute you!
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