250 | Buying Stuff vs. Buying Freedom

How much freedom are you giving up simply because you’re not viewing your money in the right way?

Most people think of their money as a way to pay bills and buy stuff, but what if instead you looked at your money as a way to buy freedom?

In this episode, we discuss a different way of looking at money than you may be used to and the practical impacts that changing the way you view your money can have on the amount of freedom you’re able to enjoy.

• • the way most people view money
  • spending everything you make
  • creating margin for yourself
  • using your money to make you money
  • financial independence
  • creating freedom through the way you manage your money

You’re listening to Personal Finance for Lawyers. I’m Rho Thomas, and as a busy wife, mom, and former Biglaw associate, I know all too well the tension between the culture of the legal profession and pretty much everything else you want to do in life. That’s why each week, I’m bringing you the information and tools you need to improve your money mindset and manage your money to create true wealth. Because ultimately, it’s not about the money. It’s about the freedom and flexibility the money affords.

Let’s talk about buying stuff versus buying freedom because most lawyers are not using their money in a way that leads to the freedom that we all want.

So, the way most people are thinking about their money is as a way to pay their bills, buy some stuff they want, maybe you buy a new bag, you go out to eat, like all of that kind of stuff. And there’s nothing wrong with those things.

However, if those are the only things that you’re doing with your money, then every month you’re starting over, right? Because when you pay the bill, when you buy the thing, you know, buy the experience, whatever it is, you don’t have that money anymore. That money is gone.

And so if those are the only things you’re doing with your money, then you’re starting over every single month.

So, you’re never going to get to freedom if you are spending all of your money.

To give you a simple example, let’s say that your take home pay is $5,000, and you’re spending $5,000. Every single month you’re starting over because you need all of that money to live on.

You’ve made 5,000. You spent 5,000. Now there’s nothing left. And so I need the income from my job to be able to live. Right?

Let’s say instead, your take home pay is 5,000 and you only spend 4,000. Now you’ve got a little margin, right? Now, you’ve got some wiggle room. You’ve got $1,000 that you’re not spending that you can set aside. And in this simple example, let’s say that we’re just setting that money aside in a savings account and you do that for four months. It only takes you four months to be able to have enough that you can cover one month of living expenses.

So, you could, if you wanted to, you could take a month off from your job because you’ve set that money aside and it’s all because you created margin by not spending everything you make.

But taking it a step further, wealthy people think about their money as a way to make more money.
So, it’s not just that we’re not spending it all, we’re gonna put that money to work to make more money.

So, they will invest in things that give them a return, right? The money is growing for them. And when your money is making money for you, that means that you don’t have to make that money, which means that you’re starting to unlock freedom for yourself.

So, going back to the example that we were talking about, let’s say your take home pay is 5,000, and instead of just saving that thousand dollars, you invest it. Right?

And let me be clear, I’m not saying that savings is bad. I do want you to save in some capacity so that you’ve got at least an emergency fund, some kind of accessible money for when there’s an unexpected expense or some emergency comes up. But beyond that, we want to start putting that money to work for you.

So, going back to the example, you’ve got the take home pay of 5,000, you’re only spending 4,000, and now you’re investing that extra thousand dollars. After a year, you’ve invested $12,000. And on average the stock market returns 8 to 10%.

So, just to be, you know, use the simplest numbers here. We’re going to say 10%.

So, $12,000 you’ve invested that money is going to make you 10%, which is $1,200.

That’s $1,200 that you didn’t have to work for. That’s $1,200 that you did not have before, right?

But not only that, that money will also continue to make you money.

So you invested the $12,000 that you made from your job. The $12,000 made you $1200 hundred dollars, but now that $1,200 will also continue to make money and it becomes this snowball thing.
So now instead of having 12,000, you’ve got 13,200, right?

The 12,000 that you invested plus the 1,200 that it made. So, $13,200.

Let’s say you continue to invest, now you added another 12,000. Now all of that money is starting to make money for you and it just snowballs from there. You see what I’m saying?

Where it’s like you don’t have to only be making money from the things that you’re doing, from active work that you’re doing. You could be making money from your investments as well.

And it doesn’t only have to be investments in the stock market. I’m most familiar with the stock market because that’s how my husband and I have built our wealth. I think most people are familiar with the stock market because those are the types of investments that are typically accessible through retirement accounts.

But you could also have real estate investments.

Like let’s say you take that money, the $1000 margin from our example, and you set it aside until you have enough for a down payment on a rental property. Now you got a rental property, you’ve got a tenant, and that tenant is paying you money. Again, this is money that you’re not having to work for.

And like I don’t know a whole lot about real estate, but I know enough to know that if I have this property and I’ve got a tenant in there, that tenant is paying me money, right? And now you’ve got this money coming in from your tenant, you still got the money that you’re setting aside, the margin that you’re making, right? The margin of the money that you’re not spending. But you can take that money, the margin that you have and the money you’re getting from your tenant, and you can put it into another investment property.

And that investment property can be making you money and so on and so forth.

It could be buying small businesses.

Like I heard this lady who was talking about how she buys like laundromats and mom and pop shops and stuff like that and she lives off of the money that those businesses make.

So like the point is you’re putting that money to work for you and you’re earning money without you having to actually be the one to go out and earn it.

I listen to a lot of interviews with wealthy people because I love hearing how they think, right? And it used to be that these kinds of conversations were only happening behind closed doors. But now we’ve got YouTube, we’ve got Apple Podcasts, we’ve got all of these places where they’re having these conversations publicly and all we have to do is take the time to listen.

But in one of the conversations, like one interview, the guy was saying that he doesn’t spend the money that he earns, he spends the money that his investments earn. So, he takes that money that he earns, he puts it into investments and he only spends the return. And I was like, man, like what would that be like, right?

Like when we’re first starting out, your portfolio is probably not gonna be big enough that you could only live on the investment returns. But as you keep going, you’ll see like, oh, this money that my money is making is enough to pay this bill or it’s enough to take some time off.

Like, I heard another lady who was talking about how she took a sabbatical, like a three month sabbatical or something like that. She went to Europe and she funded it, like lived on money from her investments. She took the growth from her investment, and let me say this, don’t do this with, like, your retirement account. She had a separate account apart from her retirement account.

If you do it with your retirement account, they’re going to take like half of it in taxes and penalties and all that kind of stuff. So if you have investments outside of your retirement account, you can do what you want with them. There’s no regulations and stuff on when you can withdraw the money and all that kind of stuff.

But she had an account outside of her retirement accounts, and she used the money that that money had made, right? The money that she invested, the growth that that money returned, the interest that it earned. She used that money to fund a couple months in Europe and just took a sabbatical. She didn’t have to work. This was money that she did not work for, right, money that her money made, but she was able to take this time off.

And so even if you’re not all the way to the point that you could just never work again, like, wouldn’t you feel like you have so much freedom just being able to take a couple of months off and not have to work in that time and just take that time to decompress and whatever else you might want to do?

When I first learned about the concept of financial independence, it was always talked about in terms of getting to a particular number. So the rule of thumb is that you have reached financial independence once you have 25 times your annual expenses invested in the stock market.

There’s a whole study that looked at how much money someone could withdraw from their retirement accounts without running out of money and retirement. And so that’s where that rule of thumb comes from.

But over the years, I found that one, there are ways to achieve financial independence outside of the stock market, like the real estate and small business place that I just talked about. But two, even before you get to that 25 times your expenses number, you start unlocking a whole lot of freedom.

Just like the lady I was talking about that took a sabbatical. Like she didn’t have to get to the point that she never worked again, she just wanted to take a couple of months off, right?

So what if you had your money set up in a way that you could take a couple of months off, that you could take a year off? You’ve got these investments where your money is working for you, earning more money and that way you don’t have to earn the money yourself.

So I just want you to think about that. Being able to take time to know how you’re going to support yourself without you actively working changes the game.

And to be clear, I’m not saying that you should invest in the stock market, or you should invest in real estate, or you should invest in businesses or any of that stuff. Like it doesn’t matter what particular investment strategy you do. The point that I’m making is I want you to understand that you can keep using your money to buy more stuff, or you can use your money to make money for you.

And that is how you achieve freedom.

Alright, so that’s it for this week’s episode. I hope it’s helpful for you, and I hope it reframes the way that you think about money.

Please take a second and share this episode with a friend or two. Sharing is how we grow this podcast, how we can get this information in the hands of more lawyers. And as always, I appreciate your support.

As we close out, friend, I pray that you take the information you learn here, apply it in your life, and open up to the realization that wealth is available to you. As you do that consistently, week after week, you’ll continue to take steps to take back control of your time, build wealth, and live the life of freedom and choice you deserve. Talk to you later.