This will just be a quick diddle today to explain a really important concept that blew my mind when I first learned about it, and which has really helped keep me motivated on the Journey to Financial Independence.
Along the journey to Financial Independence we have two options – this is represented by the two curves on the graph below;
The first option is linear – the blue line represents a traditional employee income, or a day job.
The second option is exponential – the Orange line represents the compound growth available from a business (either starting one or investing in one i.e. shares). The gradients and specific functions don’t matter, its more of a conceptual demonstration.
Realistically, we all have to start as employees as we generally need some capital to start and to support ourselves, and working for someone else is generally the simplest and easiest way to get it. What matters is what we do after we first start…
Option 1 – Money for time
Option #1 is we continue trade our time for money, and inflate our lifestyle in accordance with our wage. As we progress in life our results increase linearly – one unit of time worked results in one unit of gain, and so on. Eventually, due to our tiered taxation environment, we end up with a sort of ‘diminishing return’ – we work one unit of time, but end up with only half a unit of gain (realistically in Australia this kicks in for income earned over $180,000 as you are on a 47% taxation rate).
This was taught to me as a kid – if you want something, work and save up for it.
Option 2 – Delayed gratification
However, if we choose to instead option #2 and invest our surplus resources into a business, we take a slightly different path – an exponential curve. This occurs when we invest our time and money starting our own business, invest in established businesses through the share market, or start real estate businesses where we become a land lord with a tenant who pays rent.
This is not taught to any kids as far as I know, but it is one of the most important financial lessons you can ever learn. This mindset is ultimately what defines which social class you will belong to, and how successful you will be. The concept is ultimately delayed gratification; sacrifice something now, for greater return in the future. Or put another way, it is sustainable finances – if you want something, wait untill your investments can cash flow purchasing that outright.
Something dangerous happens when we embark on this option though, which causes the overwhelming majority of us to fail…
The Valley of dissapointment
Between the two curves is an area I like to call the ‘Valley of Dissapointment’ (to make it sound dramatic). What I’m getting at here, is that it is very easy to lose motivation on journey #2. You are constantly putting in a heap of work, and not really seeing much results. This might mean getting up early, staying up late, and sacrificing leisure or recreation time with your family or mates.
This is the grind, the slog, hard work… the Valley of dissapointment.
It is so easy to just give up, and go back to option #1 – everyone else is doing it and they seem to be just fine, right?
If you can push yourself through the Valley of dissapointment long enough to reach Star 1, something miraculous happens.
You start seeing results. Real results. Great results. Although your results probably still aren’t as big as your friends, family or peers who are on Option 1 (who probably just bought themselves a sports car or house and posted it on Facebook) – you can see your results starting to grow quicker and its very motivating.
This might be your first couple of contracts, hiring an employee, making $1000 bucks profit, reaching your first $100K invested or simply just receiving a massive dividend check. This is how you know you are passed the deepest point in the valley of disappointment – you are now closing the gap.
From here on, it all gets a little easier. Compound interest helps snowball your investments, organic growth in the business means you can take your foot off the gas pedal, and things just start to ‘work’.
When you reach Star 2, you’ve pretty much made it. Any small additional effort you make, results in an exponentially large gain. By taking option 2, you have sacrificed a lot in the beginning, but have leveraged your potential gains. You are now getting far more results than you ever could have done as an employee or by yourself, and you are completely in control of your destiny.
If you are on the journey to Financial Independence, you know how excruciatingly slow it is to start out. Like Charlie Munger says – getting that first $100K is a B***H! If you can push on through the Valley of disappointment, you will literally be rewarded with exponential gains and everything you could ever want in life. But if you never start, or you give it up to go back to being an employee and working for someone else – well, you will always work for someone else – you will never know what might have been…
Now I am not trying to deliberately ‘bag out’ employees – I personally love my job as a Pilot, and I am sure I will look back very fondly on my days navigating the world and visiting bars in different time-zones. But I know to achieve what I need to achieve in this lifetime, I must continue on path #2.