The Economics of Escape Velocity

Have you ever tried reading a personal finance blog? They’re a dry lunch, so let me save you the trouble. Here’s all those hundreds of thousands of pinched nickels and earnest paragraphs in just seven words:

Earn more, spend less, invest the difference.

That’s money as simple PHYSICS. Interest rates and digits on spreadsheets. But if the rules are so simple… why does money elude most people? Remember, the premise and promise of these memos is:

Reality-based knowledge delivered as practical, tactical advice.

So instead of meandering off on an esoteric rant…

I’ll show you.

The Dollar’s Two Faces

Let’s see if you can hold two opposing ideas in your head at the same time.

1. Money is fickle
2. Money demands respect

That is money as PSYCHOLOGY.

Appreciate the difference? Now let me be honest: I’m not where I want to be. I only traded in my 9-5 three years ago. But I am getting closer every day and that has something to do with what I am about to teach you.

I’m only going to write about this topic ONCE.

Ready?

Money is fickle.
Like a spoilt cat. It goes where the value is.

Money demands respect.
Again, a spoilt cat. If you disrespect it, it WILL LEAVE you.

If you want money to come to you, provide value to other people.

If you want money to stay with you, be a good steward.

Take notes, Mr. Montana.

Money as Happiness

The most common denominator of happiness is a feeling of CONTROL. This trumps your money, trophies, toys and prestige. And something the bloggers do get right:

Control – or good stewardship – of money comes from living within your means. I don’t give two hoots what you spend your money on and I’m not saying you need to survive on tomato soup and Malboros.

But if you want to tell a good story with your money, if you want to use it for good and convince other people’s money to come and hang out next to yours…

Then you need to know your numbers.

The Economics of Escape Velocity

The place you want to get to with your money, the place where you have “lift off…” is where for every month or year you work, you can “buy” yourself that time again in exchange. After working for one month, you have enough cash to not work for a month. Not that you’ll want to stop necessarily – but again – this is about control.

Here’s the launchpad equation.

(Post-Tax Income – Living Expenses – Debt Payments) / Living Expenses

For example, in my first year as a freelance copywriter, I made $107k. Not bad? But after 30% tax, that’s $74,900. And my living expenses added up to $45,400 (no debt though.) So $74,900 minus $45,400 is $29,500. That gives us the top number of the equation.

$29,500 divided by living expenses of $45,400 equals a total of 0.64.

$74,900 – $45,400 – 0
—————————–
$45,400

That means that even though I was pleased to earn 6 figures in my first year freelancing…

I did not have escape velocity of 1.0.

To hit it, I would have needed to either:

Drop my living expenses from $45,400 to $29,500 ($2,458 a month) while income stayed the same.

Raise my post-tax income from $74,900 to $90,800 ($7,566 a month) while expenses stayed the same.

The third option is a bit of both.

There is only so much you can reduce your expenses before life becomes miserable. But there is no ceiling to how much you can earn, so that’s a better game to concentrate on.

You’re Probably Undercharging

Making more money requires a certain level of aggression combined with the right actions in the marketplace.

Don’t worry, I’ll get into all that during our time together.

In fact, there’s a whole group of people (millions of them) for whom the price of what you’re selling is irrelevant.

What they want is energy.

See you next week.

P.S.P. French

Whether you’re already taking freelance jobs or just beginning to dream…

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