Baseball analogies are everywhere, as the good doctor points out, but we don’t have them for the FIRE community.
Well, not until PIMD wrote about them, and now I’m sharing them with you. As always, this post originally appeared on Passive Income MD.
Rounding the Bases of Financial Independence
As a child, very little filled me with more joy than visiting the ballpark. It was a magical experience. I still remember the feeling of being out under the lights, the smell of the green grass of the field, and, above all, the energy of the crowd. Nothing got me or the fans more excited than seeing our players touch home plate–hopefully more than the other team.
Of course, I’m not the only one who feels this way. America’s love of its national pastime has even brought many metaphors into our daily conversations. When we want a rough estimate, we ask for a “ballpark figure.” When someone screws up, we say they “dropped the ball,” and a mistaken accusation is said to be “way off base.” There are so many great analogies having to do with baseball and life. Why shouldn’t we have one for financial independence?
I’ve always seen the process of achieving financial independence as analogous to rounding the bases. After all, unless you hit a home run with a business or invention, there are usually steps that must take place in a certain order, just as you can’t run from first straight to third base.
Of course, “rounding the bases” often carries a different connotation, but for our purposes, let’s keep it to finances.
So this is how I think about the path to Financial Independence. Let’s go into it base by base.
Batter’s Box – Income
Once you’re producing a steady stream of income, you’re in the batter’s box. It’s impossible to start your journey financial independence without some sort of income. This income can come solely from your day job, but ideally, it should be a combination of your day job and your other side hustles / income sources. The more you diversify and add from other sources of income, the better off you’ll be and the quicker you’ll be able to get around the bases.
1st Base – Savings
Getting to first base starts first and foremost with a shift of the mind. I am definitely of the mindset that you shouldn’t completely give up today for an unknown future. However, there has to be some balance and you have to be okay with some delayed gratification.
Opinions differ as to what constitutes a good savings rate—some say 10%, the White Coat Investor says that doctors should be saving at least 20%. What we do know is that the higher your savings rate, the quicker you get to financial independence as Mr. Money Mustache clearly showed. [PoF: And I challenge you to live on half.]
In any case, the main thing is to control your spending and not to live paycheck to paycheck. Then, take that money and do something wise with it.
Now, what’s “wise” is different for everyone. It might involve paying off high-interest debt like credit cards or student loans. But it may also mean taking some of those savings and running straight to second base.
2nd Base – Investing
Now you’re really making some progress. You’ve set aside some savings, and now it’s time to make your money work.
They say the most powerful factor in investing is time, and I absolutely agree. It doesn’t matter whether you’re investing in the stock market or in real estate, this principle holds absolutely true, so don’t wait to get started.
It is also my strong opinion that you should truly diversify your investments. This is the same principle as having multiple streams of income: if and when one dries up or has a slow season, you’ve got others to rely on.real estate investments. I also believe it’s important to diversify your investments for both appreciation and cash flow.
What might this look like? Well, if you’re investing in the stock market, perhaps you use the three fund portfolio like Physician on Fire. Maybe you learn to use the Backdoor Roth like FutureProofMD. In terms of real estate, you can buy some rental property, like a single family home or apartment building, or maybe you allocate some funds into real estate crowdfunding.
3rd Base: Cash Flow
You know you’ve reached third base when you start receiving income entirely unrelated to your primary job. Focusing on cash flow allows you to change the way you live today. For example, as I receive passive income from my rental properties, I can adjust my life accordingly, today, to achieve my optimal work-life balance.
See, we tend to live our financial lives on a month-to-month basis. Budgets, rent, mortgages, car payments… all are set up monthly. So when you’ve got a passive source of monthly cash flow (other than your primary job), you get to live life accordingly. Maybe you’re able to give up a call or just take a day off. Cash flow allows for that.
So your investments continue paying off, building on themselves and each other, until eventually, your investments are able to cover your expenses. That’s when you reach home plate.
Home Plate: Financial Independence
How do you know you’re truly home? Well, you might hear different numbers about safe withdrawal rates and nest egg sizes based on current expenses.
Again, the way I think about financial independence is that the cash flow from your investments covers your expenses. Your ability to put a roof over your head and provide for your family is not dependent on you going to work that day.
Financial independence represents real freedom. It doesn’t necessarily mean you retire immediately–although you could if you wanted. You make the choices you want to make, rather than the ones you have to make because of work or other financial obligations. Home base is achieving a balance between freedom and fulfillment.
This cash flow can come from your cash-producing real estate investments, or from your dividend stocks, or from your nest egg that you withdraw 3-4% a year from. Again, I’m trying to achieve it using a combination of all of these.
Where Am I on the Basepath?
Personally, I’ve left third base and am gradually making my way to home plate. As I’ve been gaining passive cash flow, I’ve already started reducing my work time. Once I slide into home for real and achieve financial independence, I’ll have reduced my hours quite a bit more. I’ll likely never quit my day job (I enjoy it too much), but knowing I could is truly empowering.
Ultimately, knowing which base you’re on is half the battle. Once you know that, you can figure out exactly where you need to go–and in what order. Do the research, put in the work, and when you cross home, you’ll look back and realize how far you’ve really come.
PoF: How Much Does This Site Make, Anyway?
Tomorrow, I’ll be putting together my quarterly newsletter which details my online revenue, blog stats and more. Find out how I’ve already exceeded last year’s revenue and am on pace for a six-figure profit in 2018. My revenue reports are reserved exclusively for those who subscribe to the site. If you don’t like multiple e-mails a week, I also offer a weekly digest.
What base are you on? What are you running to?