Shuttle Launch

If you follow the principles that I have laid out so far you will make financial progress. I will review them here (please see my previous posts)

1. Limit your debt (see "Debt Slave")
2. Use a home based/small business to shield your income from taxes. (see "Wage Slave")
3. Limit the amount of money you spend on depreciating crap. (see "The Worst "Investment" You'll Ever Make")
4. Buy Assets (see "Don't Save Money, Buy Assets")
5. Make sure your net worth is going up each year and your debt is going down each year. (see "The Matrix")

If you follow this year in and year out you will see financial progress. However, this is not a quick process. You will not achieve financial independence in a year or two.

I equate the progress you will make as similar to a shuttle launch. If you know physics, you know that it takes more energy to lift that shuttle 1 foot off the ground than any subsequent foot of elevation after that. As the shuttle ascends into orbit, it picks up speed and momentum. After a while these forces overtake the actual thrust and push the shuttle into orbit. Orbit is a self sustaining process that requires no thrust as the shuttle falls around the earth.

Stage 1: When you start this process, it will take lots of energy and focus on your part just to stay on track. Keeping with this same analogy, the thrust from the shuttle is your income. You use your income to purchase assets and pay down debt. When your shuttle is on the ground (or even in an underground silo if you have a negative net worth), you need to push that shuttle in the air and it is a slow process. You can spend many years in stage 1 depending on where you are now.

Stage 2: As you stay on this process for a few years, you will notice momentum start to impact your returns. The effects of compound interest and asset appreciation will start to have a bigger and bigger impact on your portfolio. In this stage you will find that more than 50% of the gains in your net worth are as a result of asset appreciation instead of asset purchases and debt paydown.

Stage 3: In stage three of your ascent into orbit, the total value of your assets will exceed the total value of your debt. I reached this point in early 2006 and even though most of my assets were in retirement accounts (so I couldn't really access them to pay off the debt without paying big penalties to the government), it was an incredibly satisfying day for me. At this point, you should be earning more each month in income (interest and dividends) and appreciation from your assets than you are paying in interest on your debt.

Stage 4: At this point your shuttle is entering orbit (financial independence). Big characteristics of this stage are paying off all your debt and earning more from your assets than you earn in your day job. Other than stage 1, this will be the stage you stay in the longest (hopefully the rest of your life). You will no longer need to use debt to purchase items because there are sufficient assets to pay outright cash for things. Please keep in mind that you will continue to accellerate when you are in this stage.

Orbit: You'll know you're in orbit when your assets generate enough income to provide you with a comfortable lifestyle and you no longer need to work to live. Instead, a person in orbit will live to work and live in financial freedom!

Unfortunately, everyone's orbit is different. Likewise, it's not always a straight shot (market downturns or large purchases can set you back). But as long as the overall trend is going up, success will be yours!