Time versus Money:

  1. The Fundamental Equation

    To achieve financial independence, one of the most important concepts to understand is the concept of time versus money.

    Time must be converted to generate income. This is especially true at the start of an individual’s journey to attain financial freedom. The fundamental equation looks like this:

    T = M

    Where “T” represents time and “M” represents money.

    Time and money are two equally important components and together they make up the raw resources of wealth. When one spends time to do something, time is really converted into something. Therefore, if you spend time to watch a movie, you are converting time into pleasure. If you spend time to make money, you are converting time into money.

    So working as an employee is really converting your time into money. But simply converting time into money does not necessarily lead to financial independence. The secret to financial independence lies in converting time into money in a way that will require less of your time to generate more income for you over a certain period of time. If you keep converting all your time into money without establishing automatic streams of income, you are merely trading time off for money. True financial independence implies that one has not only money to spare, but also time to spare.

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  2. Time Usage

    This is how the two resources of time and money are used by most employees and small business owners:

     
    Diagram 1:
     
    Where “T” represents time, “M” represents money, and “L” represents life. In short, we convert the majority of our time into money. Whatever little time is left goes to our lives where life represents all our expenses for living, entertainment, retirement and so forth. We have only limited amounts of money to spend on life, and it is limited in how much it could grow to. This is how most of us start our adult lives, and unfortunately this is where most of us stay throughout our entire lives.
     
     
    This is how the two resources of time and money are used by truly financially independent individuals:
     
    Diagram 2:
     
    The financially independent decrease their personal time that needs to be converted into money. As a result more time and money are available to spend on life. In short, these people live more and work less over the span of their lives.
     
    To become financially independent as is illustrated by diagram 2, one needs to go through 4 steps.
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  3. Step 1

     

    Initially money can only be acquired through directly converting your personal time into money. Typically you are an employee giving 8 hours a day to the boss and receive a fixed amount of money for this time. There is an upper limit to how much you can ever earn. If you stop working and thus stop using time for money, you don’t receive any money.
     
    Unfortunately this is the most challenging state to change because you will need to change priorities, come up with a plan and commit to it. It requires a lifestyle change and a mental paradigm shift.
     
    Step 1 is where you already are, the departure point on the journey to financial freedom.

     

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  4. Step 2

     

    To most people risk management means limiting or hedging one’s financial risk in terms of business or investments. It could also be thought of as insurance like liability insurance or life insurance. Few people however realize that time should also be hedged. Not only do we need to have insurance on our lives and our belongings, i.e. protecting the “M” and the “L”, but also our time – “T”.
     
    Step 2 requires you to assess your financial situation and review your budget of time and money and how your current position is in life. Because life is full of unexpected events, you need to protect as much of your time, money and life from risk as possible.
     
    If you have not done so already, start by looking at your finances. Stop unnecessary expenses. Then set up a monthly deduction plan of say $50 - $150 a month to be used for life insurance as well as some form a retirement nest egg. There are so many options available that it may be worth your while to find a good financial advisor. (Choose your financial adviser wisely – some merely want to sell you their financial products with no consideration of your needs whatsoever. Ask for references before you sign.)
     
    Among options you may choose a plan that combines life insurance with a compound interest bearing investment, or you may want to consider term life insurance instead and buy some mutual funds to get you started. The latter is more flexible to change as you change and grow. Your journey towards financial independence will prompt you to increase your financial intelligence. As you become more financially savvy you will use more effective and sophisticated monthly deduction instruments. But always use what you know and feel comfortable with. Having these monthly deductions will serve the purpose of doing “at least something” to fund your retirement (like a safety net) while you are working on becoming more financially literate. Especially if you have little education and have a low-income job you should give priority to this minimum monthly deduction plan. With a low income job and education it may take longer to break out of the groove and then it is vitally important to have a monthly deduction investment to insure that you retirement will be a reality no matter how successful you are in your journey towards financial independence.
     
    The second and equally important way to hedge your time is to devote some of your time to start an education program.  Spend some time and think about what you would like to study. Remember that one day you want to be financially independent and a regular job will not accomplish that for you. The “job” should not be pursued as your “dream job” and you should not spend too much time and trouble to figure out what exactly you want to do. You need to consider a job unemotionally because the job is one of your tools to be used to hedge your time and allow you to more efficiently convert your time into money. Of course, if you could easily choose something that you are fond of, it would be great! As long as choosing a particular job does not become your major decision factor.
    Acquiring a good education and a professional marketable discipline serves more than one purpose. Step 2 is very important to move towards financial independence and is comparable to laying the foundation, plumbing and wiring of a new building. Firstly, time spent to acquire a professional designation serves as insurance. If all else fails and you fail to attain wealth and financial independence, then you have a good-paying job that is in demand. Secondly, it improves your efficiency in which you convert time into money because of a higher paying job. This gives you more money to apply towards your financial future. Thirdly, becoming a professional will expand your mind and improve your self-esteem and will equip you with many transferable skills that will be essential in your financial endeavors. A fourth benefit is that choosing your professional career wisely will lend itself ultimately as a business opportunity as well.
     
    Take an accountant for instance. It is an occupation that is always in demand all over the world. You can easily start a practice and then expand your practice to employ others. It will be extremely conducive to improving your business skills and financial intelligence. It will put you in touch with many business contacts.
     
    On a more technical front you may want to consider becoming an electrician or plumber. These professionals are always needed all over the world. You will be making many contacts, especially in the real estate arena, and you can start a very successful business in this industry.
     
    Regardless of which discipline you choose, it needs to compliment your efforts to become financially independent. It should be internationally and continuously in demand, it should compliment either your financial intelligence or business contacts network, and it should lend itself as a viable business opportunity. A practice would be an example of a business.
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