Measuring your progress towards being unconstrained

Becoming unconstrained takes time.  It is important that you have some way to measure how are you going along the journey.  Here’s a few tips and tricks you can use and how to know when its right to quit your job and be free

If you think that becoming unconstrained is something you can do overnight, then you are mistaken.  This is a process that takes time.  Years.  So you have to be patient.  Many cannot stay on the journey because they get distracted by life.  The costs of immediacy and the pursuit of instant gratification are enemies to the journey towards being unconstrained.

Looking back on my own life, if I had learned these lessons in my 20s or 30s, I could have been free far earlier.  That would have meant such a change for my life and family.  But I’m thankful that I worked it out later.  At least I can try and move forward from this point.  But for those that realize that life is a marathon - not a sprint, they can begin earlier than I did and get to freedom and personal sovereignty far earlier than I ever did.  So you have the chance I never had.

Let’s look at what I discovered and how I measure progress.

Metrics

It really helps if you like spreadsheets and capturing data.  Most of us do this without realizing it, and certainly if you run a business you probably do it because it is just good management practice but also the tax man requires you to.  We use methods from the 1800s in accounting for this because we have no real reason to seek out other forms of capture of information.  It just so happens that the industry accepted documents of Profit & Loss (P&L) statements and Balance Sheets (and possibly Cashflow statements) are understood by your accountant and the tax authorities, so as a result they are forced back upon you to make the most of as some magical document of information to help you make profit.

That all works fine for day to day business operations.  It also helps with budgeting.  But we rarely question those documents.  Most small business people I know spend a lifetime with book keepers and gathering financial numbers so they can keep their accountant and tax man off their backs, but they rarely look at this from a selfish perspective.  If they did, then they would realize they are often looking at the wrong numbers and wrong reports.

You see, a P&L statement shows you how well you are doing for generating profit.  But profit is never tied to physical labor used to generate it.  And that’s the missing metric.

If you are a contractor or someone who sells their time by the hour, then you probably use some form of time capture or job management system, so you can invoice it out later.  Although I firmly believe that is the wrong work to do, because you can’t scale it and you have to do the time to get the money, it does however allow you to capture time spent on things.  And that’s where the wisdom comes from.

Did you know that most service technicians only bill about 18 hours of the 40 they work?  That means that more than half of their time is spent either wasting time or doing things that support those 18 hours.  If they could just get another 10% or 20% time utilization, they’d be far richer.  But the reality is that if you have to sell your time by the hour, it really doesn’t matter how rich you are because you only have one life and you are prostituting it away.  That’s the core problem right there.  

So if we know that the key is to make money without having to spend time, what if we captured where our money was coming from and relate that back to activities that we do (or don’t do) to earn it?  

That’s where you have to start.  Stop trying to measure Profit without matching it against Smart income (ie. what you did to make it).  And stop trying to use Time management systems that try and get you to generate more money from your time, when the entire process is flawed that you are generating ANY money from your time.  If you approach your metrics using Smart Income as the foundation, your reports and data capture requirements look a lot different than traditional accounting or time management systems would give you.

Change your P&L Income accounts

The first thing anyone who is using Quickbooks for income accounts in their P&L is to at least split their income accounts into “Active” and “Smart” groups.  That means if you have just one big “Sales” account, stop that.  You need to identify what income is made from sources that either involve your time vs. sources that do not involve your time.  Think of it as active income from time spent vs. residual income from time invested in the past.

That’s the first place to start.  And if you have many businesses, like I do, then you probably need some way to get that data and feed it into a master spreadsheet.

Now track your Smart Income

I’m going to publish my magic spreadsheet soon (probably only to Patreon supporters - sorry but you can become a supporter here ) but the key is to take the profit from each business entity in total, per month, and then remove your other expenses that can’t be passed as expense items within the businesses (and hopefully they are minimal), resulting in total income in $

Separate to that, however, you need to split out from that $ what you made from Smart Income sources, vs. what you made from Active income sources.  That’s the key.

And you have to split this out as a %.  Here’s the simple formula to this:

TOTAL BURN RATE should be made up by TOTAL SMART INCOME + a 50% buffer

It won’t be from day one.  But if you can track each source of income that is Smart income and a % of your total burn rate that it would cover, and track that over time, then you can see how you are doing.

This is the key part of the process.  You have to be patient, but you have to be tracking this.  I do it daily, but the key results are really monthly totals.  You want to see trends upwards towards smart income representing 150% of burn rate.  The higher that percentage goes, the better you should feel.

The levers here are very simple.  You can either reduce your burn rate, or increase your smart income.  That’s really it.  The problem is that mainstream accounting practices never split income this way.  The Rich do.  But not the average Joe.

The average Joe is told to increase their “Income” so that they make a profit.  Yeh, that’s great for the Tax Man.  Not great for Joe who is going to work for the rest of his life without realizing he could have done this a whole lot easier if he just looked at his numbers differently.

When am I financially unconstrained?

Well the simple answer is when your Smart Income represents at least 150% of your burn rate, for at least 6 months in a row.  

Is that when you can quit your job and live free?  Kinda.  You need some buffers though.  There are a few variables that you should cover first, before you lose active income.

1. Emergency Fund
   
   You need at least 3 months of burn rate in your emergency fund.  This should be liquid cash that you have in a savings account you cannot easily get to, but that you can access (or a family member) within 48 hours.  I suggest a low cost bank or credit union that is not directly accessible without someone traveling to the branch.
    
2. Future proofing
   
   If your income is not tied to rising with inflation (rental income is tied to inflation in that you can raise rents on new leases), then you need to have some way to ensure that your income is kept up with inflation in some manner.  Also if your smart income is based on technology or anything that has natural obsolescence, then you will need to allocate time to maintaining it.
   
   For example, if you run a website or eCommerce system that generates income while you sleep, that’s great.  But know that with all the changes going on with Google SEO, different devices being used to access it (ie. phones, TVs, etc.) and all the changes in the web world, you are going to have to rewrite it or massively overhaul it at some point in the future.  Probably every 3 years or so.  That means you will be spending time maintaining it.  Is that Smart Income?  Yes, it still is.  It is that you will see some variations in income over time, and without maintenance the income source may deteriorate so be prepared for that.
    
3. Diversification
   
   If you have only one Smart Income source that represents more than 75% of your burn rate, then you need to diversify.  This is simply to protect you in the case that your main income source disappears.  Again, less likely if the source is lower level Maslow’s physiological needs.  Renters, for example, will terminate or abandon leases but you can always get another one.  Just know that there is a Move In/Move Out “flip” cost here and you need reserves for that.  But at least you can rent to a new tenant.
   
   But if your income sources are reliant on existing clients that cannot be replaced if they leave, then you are at risk.  You need to diversify to remove risk and ensure that those income sources represent a % of income that, if they went away it would not stop you making 150% of your burn rate without them.
   
   There is a lot of sense in having a number of varied smart income sources that represent small amounts each due to the power of diversification as a risk management strategy.  Just be careful that they don’t represent a huge time requirement to manage.  For me, those smaller ones (like vending machines, commissions, etc.) are the most fun to do because I like to do those.  But everyone is different.

Playing the “What if” game

When you start to track your progress and you can see that magic percentage of how much of your burn rate is being generated from Smart Income, it is very empowering.  You know you are on the right track and you can see where you should spend your time and focus.  Each month you should hope to see an increase.

It won’t be linear though.  Everything goes through the variables of life.  Car breaks down, roof needs repair, some unexpected medical bill, have to help parents out, kids need braces, etc.  These things are part of life.  You have to be realistic in your burn rate that you allocate some % towards those unexpected things.  And the biggest enemy to static numbers here is technology.

Technology goes obsolete and these days manufacturers of the products we use know that built in obsolescence is part of their business model.  To them, they want you to trade in your phone in 18 months or less, or your car in 3 years.  But to the unconstrained, we know when we are being scammed so you buy higher quality products that last longer.  Over time, you find that they daily cost of those things are way cheaper than the inexpensive alternative that only lasts 50% of the life of quality.  Plus your world needs quality.  Let’s face it - we are not trying to be rich for no reason.  We want security and independence but also we want the nicer things in life.  So buy that European car (with cash) that will last 5x longer than the Korean version if you can.  You will benefit everyday from it, and as long as you believe you can afford to service it and keep it for 10+ years, then it is a much better choice.

So with that said, you also have to ask yourself a lot of “What if” questions.  Questions like:

• What if I needed to replace my car?
• What if my medical insurance premiums double?
• What if hyper-inflation starts?
• What will happen to my plans if/when my kids want to go to college?
• What if I get sick?
• What if my spouse gets sick?
• What if I get involved in a lawsuit?
• What if there is a massive climate/weather event?
• What if the asset class I’m invested in tanks?

Now you have more time to think about these things, you can address them more creatively.  Time gives you more power.  That’s why I travel the world to get top quality medical care at 10c on the dollar to the USA cost.   I can get ahead of risk and get massive savings by being prepared.

Remember, SUCCESS is when PREPAREDNESS meets OPPORTUNITY

Now you have the time to be prepared.  And being able to look at your numbers and play the What If game is just a way of being better prepared.

Pulling the trigger on quitting your job

If you have run the numbers, have 150% of your burn rate covered with Smart Income, and have an answer to all the risk management questions (and the others only you can ask yourself), then it will be clear when you can break free of the 9-5 job.

Only you can make that decision.  Know that everyone around you will think you are insane.  They will see you giving away the income from employment thinking that it is a stupid idea.  That’s how it goes.  They still have their 9-5 work slave gig, so they will resent that you don’t.  You are not loyal to the slave master, so you are the enemy.  That’s ok.

They will eventually come around to your way of thinking (and doing).  But it takes time.  Just be prepared for the criticism.

Know that quitting your job isn’t about the one job though.  It is about your competitiveness in the field of work slaves.  If you are not gainfully employed, doing the work slave thing, then other slave masters won’t look kindly at that.  They’ll justify it with “Well you haven’t been working for X years, so you probably aren’t very good anymore at what you do”.  

The thing is that when you break free, you won’t want to go back.  That’s why being unconstrained is critical that you time this right.  Know that once you break free of the shackles you won’t want to go back, but to be honest the door will be shut behind you and probably locked.  You probably can’t go back.  

I hear so many people doing the FIRE thing (Financial Independence Retire Early) thinking that if all goes wrong, or they get destroyed in the stock market or they can't afford to live off their withdraw rate, well they could always go back to work.  Errr  No.    Work door has closed to you.  If you returned to it, you would be going back to work as if you were a junior again.  Because first, the employers don't want someone who clearly isn't their slave and second, you are not competitive anymore.  The cost ot get competitive again could be prohibitive or the time required could be too long, so you are not really an attractive employment option.  And the chances are that when you realize that you are not getting a return on your stocks, it is because the economy is in recession or a bear market, and that's when unemployment rates go up and employers have the supply/demand curve titled well in their favor.  No - if you are going to exit the 9-5 workforce, you are doing this permanently.  There is no going back.

It takes a lot of habit changes to stop thinking like a work slave.  It is really easy to accidentally return to the “sell my time by the hour” model because that is how we have been raised.  But you can’t.  So you should use the opportunity to exit the work treadmill strategically.  Take with it money, but more importantly set yourself up WHILE you are on the treadmill and that means start to get a bit selfish.  You don’t need to give all your time to your boss outside of the contract you signed in the first place.  Because each hour of time that you give them is one hour of time you are not spending on your smart income projects.

By tracking your progress using the information here, you will start to see how valuable time really is.  And how you can regain it back.  Your employer won’t like that, so don’t tell them.  You might want a lot of support as you transition through this, but trust me - you won’t get the support from your work mates or your boss, and probably little from your family unless they also embrace the desire to be unconstrained.  I would suggest trying to spread the teachings of being unconstrained to those closest to you because they will likely understand it better because they see you all the time and what you have to go through in order to provide them with financial security.  If they realize that you winning this game is them winning as well, then you will get allies.  Then you have a support system.

With that behind you, quitting your job isn’t going to be that hard.  It will almost be an organic action if your Smart income % is 150% of burn rate, and you have the risks mitigated.

So what are you waiting for?  Why are you not yet on this path?