finances

What is rich?

Last updated on August 14th, 2022 at 09:27 am

I know a lot of people who make an extraordinary amount of money, but few people who are rich. Rich is having passive income greater than your burn.”

– Scott Galloway

I love the simplicity of this definition (passive income > burn) but think it’s a better description of financial independence than rich.

Your financial independence boils down to just a couple of numbers. Here are mine:

  • $75,000/month
  • $6,000,000

What do these numbers mean? Where do they come from?

In The Millionaire Fastlane, MJ DeMarco calls these numbers your “Business system target” and “Money system target,” respectively:

“This dual-flanked attack builds a passive income stream from a business that funds a money system. The result is like warping the destination to you.”

A quick summary of each target: the Business system target is how much your business generates per month, ideally as passive income. 40% goes to taxes, 40% goes to fund your money system target (more on that below), and 20% pays your lifestyle.

Then, your Money system target generates passive income from a single lump-sum of cash. The passive income is generated via five percent annual interest, which covers lifestyle costs and taxes.

Here’s how you can calculate these numbers for yourself (use this spreadsheet to make it easy):

  • Calculate your monthly fixed costs: mortgage/rent, schools, insurance, groceries, cars, etc. Let’s say this is $10,000/mo
  • Calculate monthly variable costs: clothes, gadgets, dining out, etc. Call it $4,000/mo
  • Add these together and call it your Gross Living Cost of $14,000/mo
  • Calculate your Net Living Cost by dividing this by 60% to account for taxes. $14,000 / .60 = $23,333/mo
  • Next, calculate your Money system target by multiplying your Net Living Cost by 12, then divide by 5%. Five percent is the minimum expected yield on a money system. $23,333 X 12) / .05 = $5,599,920
  • Finally, calculate your Business system target by multiplying your Gross Living Cost by 5. $14,000/mo X 5 = $70,000/mo

There are different ways to calculate your financial independence numbers. I prefer this one because it has a strong opinion on how to reach these numbers (start a business).

Some observations once you calculate this number for yourself:

1. Disbelief is the default

The typical gut reaction: these numbers are cray cray. I felt the same way years ago, when I first read DeMarco’s book. In what cartoon world could I generate $75,000 in passive income? How would I ever have $6,000,000 in the bank? At the time it felt delusional.

Today, I have friends fast approaching those numbers, and know others who’ve surpassed them. The Bannister effect is very much in play.

(Caveat: I also have friends who have achieved financial independence with numbers MUCH lower than this. They have an incredible lifestyle. Lots of ways to skin this cat.)

2. Specificity is a powerful psychological tool

Any formula that calculates financial independence uses bro math assumptions. But this formula is:

(a) Specific (b) Directionally correct

Combined, that’s a psychological 1-2 punch, more powerful than pipe dreams (“I’m going to be a billionaire”) and ambiguity (“I want to retire… someday”).

3. Your target numbers enable and disable certain paths

If your Money system target is $6,000,000, then you can’t settle for incremental wins only

Increasing your savings rate, negotiating higher salaries, and 8% returns on the stock market are wonderful things. They lead to financial security. They should continue to be part of your personal finance calculus. But alone, they don’t get you to the target.

The size of your target number may force you to find bigger bets, ones that require more time, energy, and risk, but have outsized returns.

Here are some simplified examples:

  • Join an early-stage company → Execute options → Liquidation event → Repeat
  • Join a company → Develop expertise → Become a high-ticket consultant
  • Start a business → Sell the business → Advise & invest in other businesses
  • Become an artist → Command an outsized quote → Do brand deals & earn residuals

Each one of these paths requires books to cover the how-to, examples, and various nuances.

Take joining a company, which most people are intimately familiar with: you trade a company your time in exchange for money. Even in this simple exchange, there are countless nuances that enable and disable certain money targets:

  • Industry. Two marketing managers climbing the same career ladder in different industries have different trajectories. The upside of joining Google vs. say, NBCUniversal vary widely, from a compensation, equity, and brand perspective.
  • Company. Joining different companies within the same industry and of the same size can produce widely different results (Google vs. Yahoo circa 20012).
  • Stage. The earlier you join a company, typically the greater the share of ownership you’re able to take on. The more you own, the greater the upside if the company gets acquired or goes public.
  • Roles. In technology companies, there are large jumps in salary bands in different functions. Typically it goes: Engineering > Product > Marketing > Support. I don’t recommend choosing a role based solely on salary, but it does enable/disable certain paths, so is worth mentioning.

It’s fascinating the process of achieving financial independence isn’t taught. Instead, we’re conditioned to think it’s greedy, selfish, or weird, to think this way.

We’re taught the only sensible path is to go to school, get a good job, and work hard, instead of:

  • Start with the destination in mind
  • Calculate the cost (use this sheet)
  • Calculate money system and business system targets based on that cost
  • Learn the paths that enable those targets
  • Design your own path to reach those targets
  • Execute against that path

Thanks as always for reading.

Do me a favor? If you enjoyed this, please reply and let me know. I’m considering writing more about how to enable different paths to financial independence. Thanks!

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