It’s just that simple.
When I was in my 20’s I purchased a game by a well-known financial guru. It was a board game that taught you how to become financially free (i.e., your monthly income exceeds your monthly expenses). It starts similarly to the classic game of Life, where you are a banker, doctor, electrician, etc. You are given their monthly balance sheet and you need to figure out the fastest way out of the rat race.
When I first played this game, I made the classic mistake that nearly every middle-class person makes: I started paying down debt. Now, there is absolutely nothing wrong with paying down debt. In a lot of cases, I strongly encourage it (especially if it’s “bad debt” such as credit card debt). Anytime I’d get a chunk of cash in the game, I’d pay off fictional car notes and student loans.
In short, I was giving all of my hard-earned cash away to everyone else, and not paying myself first. Although I was reducing my expenses, I was not aggressively creating income. And becoming financially free is all about aggressively creating income.
It took me two or three times playing the game to realize that the fastest way out of the 9-to-5 life is not to pay down all of your debt first. On the contrary, the fastest way out of the rat race is to create as much passive income as you can, as soon as you can. Not only does this protect you if you lose your job, it starts a snowball effect where you are able to save more and put more of your money into motion to create income.
Here’s a real world example.
Not long ago I paid off my car. About three or fourth months before my final payment, I got a phone call (and a notice in the mail), that I could pay off my car “early” (they contacted me, btw, because they had collected all of the interest on the loan). I politely declined. Why? Because that $1,000 I could have given to the bank to pay off my car is $1,000 that I could put toward wealth creation.
If you want to become financially free, you need to stop giving your money away to everyone else first. There is a passionate movement called FIRE (financial independence/retire early), which advocates for 1) aggressive savings, 2) conservative returns, and 3) reducing every expense you can possibly reduce. There are a lot of good ideas floating around the FIRE movement, but there is a bit to criticize, as well.
Create Income or Reduce Debt?
For instance, if I said you could pay off your house in three years, which has a mortgage of 3.25%, or you could create a secondary income stream with that money at 25% APR, which would you choose? Many people immediately want to pay off their house, because it is their largest monthly expense.
However, when you do the math, you realize that you will make significantly more money creating the income streams at such a high APR. Not only that, but you’ll be making those income streams sooner. And if you know anything about the time-value of money, you understand that money today is worth more than money a month, year, or decade from now.
The challenge most people have is that they don’t have the means to produce income so aggressively. Which is where we come in.