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September 2, 2024

What I Wish I Would Have Known About Building Financial Freedom

The Standard Plan

Ever since grade school, the financial plan that I had always heard was: get a stable job, save a large percentage of your paycheck, and plan to retire when you are 65.

It was not until recently did I realize some of the limitations with the original plan. You can not scale a W2. My original plan to find that stable job (medicine) would mean that my ability to earn money would be tied to my body and mind’s ability to function in a specific role for my whole working lifetime.

Truthfully, there is nothing wrong this plan, saving is a good idea, finding a stable job is a good idea, but there are limitations.

If I stepped away for an hour, or a day, or a week, I would not be making money. If I were to get hurt and couldn’t do my job, what would I do? Just collect disability insurance? How many plans are you taking out 2-3 separate plans to cover your surgeon salary? What if I wanted to make money while I was on vacation or sleeping, how would I do that as a surgeon?

Then my mindset started to shift. How could I learn how to build something that could scale, make money for me while I sleep, be a source of income to out-earn my W2 or allow me to walk away from medicine early if I wanted to.

Exploring Ways to Build Financial Freedom

I thought I could find a workaround through investing. I will become a boglehead (https://www.reddit.com/r/Bogleheads/), and take every online guru’s advice and invest in the S&P 500 index fund. Then I realized that this is probably a good way for the average person to do their best to preserve wealth over long periods of time. But, for most, the S&P 500 alone will never let them reach the point of financial freedom (or F*ck u money) within their younger years, let alone their reasonable working lifetime. (I still love index funds and think they’re great).

But what about the FIRE (Financial Independence Retire Early) movement? (https://www.reddit.com/r/Fire/?rdt=46444) Well, if I just focus on cutting costs infinitely? Then I will have enough money to retire early! (I love talking about lean processes and ensuring that costs remain low, but it is easy to focus on cost cutting so much that you lose out on opportunities. Tripping over a dollar to save a dime, as the saying goes.

But, in my mind I don’t really want to retire, I just want to work on meaningful things that I care about and not have to worry about the pay checks.

Then I discovered FAT FIRE (https://www.reddit.com/r/fatFIRE/?rdt=63055). Fat FIRE for those who don’t know, is like FIRE only multiplied by 100x, these are people trying to figure out what to do with >10-100million. (Hire a private chef, fly private, take it easy and stop stressing about starting the next business, diversify your NVIDIA stock portfolio…etc.)

So what else is there? Well, I figured out that it just depends on what you’re goals are and if you are playing the right game to be able to reach those goals.

I figured out that my goals are to build and acquire assets that work for me, that surpass my W2 earning ability for the sake of financial freedom.

The question is, what should you spend your precious time doing that will have the most impact to get you there?

10 Common Strategies to Build Financial Freedom

Here are some common strategies to obtain financial freedom that I have seen brought up:

1. Prioritize Stability (The Standard Boomer Plan)

Have a stable job, work standard hours. Save towards retirement by using tax advantage accounts. Invest in diversified index funds/ the S&P 500. Enjoy life after retirement.

  • Pros: Lower risk, somewhat reliable, compounding does not take off until >$100,000 saved
  • Cons: The S&P 500 and total market index funds are not risk-free, your retirement timing may correlate with a significant down market, historical averages do not always predict future performance, you may not have enough compounding time to have a large amount of money before 50 depending on your spending habits and goals.
  • Examples:

(Four Pillar Freedom)

2. High Income then Invest

Prioritize a well-paying job (higher salary > stability), maximize tax advantage accounts, invest in index funds, individual stocks, real estate, and alternative investments.

  • Pros: The job gives you many “at-bats” to attempt to find good investments,
  • Cons: Easy to over-diversify, must control impulses to avoid chasing shiny objects, funds can dry up if unable to work day-to-day, highly variable outcome as to timing for freedom goals.
  • Examples:

3. Learn Skills then Funnel to Low-Risk Cash-flowing Businesses

Work a job to prioritize learning skills (target learning investing and business skills), use skills to build low-risk cash flowing business and funnel into real estate. Transition to entrepreneurship full time and continue buying and building assets.

4. Keep W2, Build Asynchronous Businesses

Have a W2 job, but work on a business concurrently.

  • Pros: Maintaining your job can lower your risk, cashflow allows many “at-bats” and attempts to start and scale a business, scalable
  • Cons: Businesses can fail, requires specialized knowledge, can be time and capital intensive
  • Examples:

5. All-in, One Business

Go all-in on one business.

  • Pros: Focused, very high-value potential
  • Cons: You never know which venture will be successful, high risk – high reward
  • Examples
    • Bill Gates: Microsoft
    • Steve Jobs: Apple

6. Solopreneurship

All-in with solopreneurship, maximize autonomy and freedom.

  • Pros: design life around freedom from the start, can be scalable
  • Cons: difficult to know what venture will be successful, specialized knowledge
  • Examples:

7. Multipreneurship

Go all-in with multipreneurship, build and acquire multiple businesses, maximize diversity through scalable systems and a holding company

8. Investment-based Entrepreneurship

Go all-in with investment-based entrepreneurship (Build a private equity, hedge fund, venture funds, holding companies).

9. Day Trader

Go all-in with pure public equity investment focus with day trading or options trading.

10. All-in Real Estate

All-in with real estate, roll cashflow and 1031 into more real estate.

  • Pros: Scalable, moderate risk, reproducible
  • Cons: Is not passive, can be time-consuming, high capital requirements for small returns, real estate market requires specialized knowledge, tenants can be horrible
  • Examples:

Asset Distribution Based on Net Worth

So what makes up wealth? Here is a breakdown of asset distribution based on net worth tiers.

This data is from the 2016 Federal Reserve survey of consumer finances to understand how wealthy the top households are in the US, and to cluster affluent households by asset allocation. (visualcapitalist.com.)

Here is the breakdown:

$10K: Largest percent of wealth in Primary Residence and Vehicles

$100K: Largest percent of wealth in Primary Residence and Retirement (IRA)

$1 Million: Largest percent of wealth in Primary Residence and Retirement (IRA)

$10 Million: Largest percent of wealth in Business Interests and Mutual Funds

$100 Million: Largest percent of wealth in Business Interests and Mutual Funds

$1 Billion: Largest percent of wealth in Business Interests and Stocks

(visualcapitalist.com.)

Takeaways

So what is the takeaway?

Depending on your goals, the higher net worth individuals get there through owning business interests or assets.

Businesses can be designed in a way that is scalable and allows freedom in a way that a W2 can not.

There are alot of investment gurus that tell everyone how to invest, how to manage their finances…etc, but how are they themselves making their money? They are building a brand and business around giving that investment and personal finance advice.

People should develop their knowledge in multiple areas, personal finance, investment knowledge, and business knowledge.

My personal goal:

“Build and acquire assets that work for me, that surpass my W2 earning ability for the sake of financial freedom. Continue working my surgeon job because I enjoy taking care of patients.”

Questions

What are your goals?

What other strategies to build financial freedom have you found to be effective?

What strategies exist that are reliable and will get you there before you turn 65?

How do you know what is worth spending your time on?

References:

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