The first step to escape the hamster wheel and reach financial independence is to get your income targets clear. The right target might be a factor 5 more than you would expect.
I thought I was doing well with my business at the moment. But after watching Grant Cardone‘s video below, I have to conclude I have some work to do.
Bad news. Your income is probably too low to escape the hamster wheel.
You should get your income not to where you can pay the bills, but to where you can invest 40% of your gross income for your future freedom.
Go broke each month and invest heavily until you earn enough passive income from real estate, index funds and other assets to replace your income streams.
Roughly 40% of your income goes to income taxes, and you might want to invest the same amount of money in your own future as in your country’s.
Let’s take my budgets as an example, so €2.000/month of expenses.
If I want to invest 40% of my gross income, I have to multiply the expenses by 5 to set the right income target.
This means I have to make €2k*5 = €10k/month.
That is, if I were an employee or freelancer that works for money, the left side of the cashflow quadrant. When these people stop working, their income from work turns to zero.
But, I’m happy to be at the right side of the cashflow quadrant, where people that let money work for them are (entrepreneurs and investors).
I built a system that generates income without having to put in time. I have always instinctively worked to get there, even before I knew the cashflow quadrant theory.
This system will still exist when I retire, so this will generate a part of the monthly income I’ll need in the future. Hence, I’ll need a to make a lot less now.
This is yet another important reason to try to get to the right side of the cashflow quadrant as soon as possible.
Paying yourself first is a mindset.
It places investments on the first place, instead of on the last, to make sure you make them each month. You pay your future self before you pay taxes and your current self.
This creates external pressure to earn enough income to be able to pay your taxes and your bills, and makes it feel more of an obligation.
By paying yourself last, the pressure turns internal, which eventually compromises your income because it is easier to forsake when you are accountable to yourself.
Living frugally, or not buying stuff you don’t need, is one of the most important equations of this strategy. Cutting down my expenses to €1.500/month will have a significant impact on my targets; €1.500*5= €7.500 gross income = €9.375 MRR.
So cutting €500/month on expenses makes a difference of €3.125 on the monthly target, i.e. cutting costs is a gigantic leverage. For every € you spend more, your target increases with €5.
Yet another reason to own less stuff, don’t buy a car and not own a house to have more freedom to save money when necessary.
This is a completely different mindset than society’s default; spending everything we earn because we have a good salary, meanwhile not thinking about our own future.
If such an attitude ensures one thing, it’s that you’ll never escape the hamster wheel.