A Mental Model for Making a Tradeoff between Financial vs Career Freedom

What are you opting for: financial freedom or career freedom?


How do you make that tradeoff?


We talk about money as a means to an end, and the ‘end’ often sounds like this, “work hard, save up and invest so that you can retire and enjoy life.” Some never get to enjoy life as death comes prematurely. Some struggle their whole lives, paying off debt or paying for housing and family, that they never get to stop working and enjoying life. Even the FIRE movement, a lifestyle model that became popular among millennials in the 2010s, advocates that one should save 50-75% of their income so that she can have financial independence and retire early. This makes me wonder: is this the right mental model to think about money? Why should we compromise our current happiness for future happiness?


TL;DR

  • Financial independence is hard and it’s a multi-decade effort.

  • Instead of striving for financial independence, we should strive for financial freedom.

  • Once you have the required financial freedom, you are free to explore career freedom.

  • Career freedom allows you to increase leverage and take a calculated risk so as to generate outsized returns, which should get you to financial independence faster.

  • This is a generalized mental model, the way you apply it depends on your risk appetite and stage of life.


Financial independence generally means having enough capital to sustain your life without having to work, in other words, to get to a point where your passive income from the investment of capital can cover your expenses. While that number varies from person to person, a rule of thumb is to have 25x your annual expenses.


If you spend $50k per year, you will need $1.25M to be financially independent.


How long do you need to work to get there? That’s probably 20-40 years of your life assuming you work in a corporate setting.


With a $100k income per year, your after-tax income might be $70k. Assuming you save 40% (that’s $28k), you’ll get to $1.25M in 44 years. Now if you invest that capital at a 6% interest rate, you’ll get to $1.25M in 22 years (you can input your own scenario in this calculator).


In this scenario, your income-expense profile looks like this:

Income-Expense Profile for Corporate Jobs

Financial independence is hard and it’s a multi-decade effort. This may be why some people stick with a soul-sucking but high-paying job with hopes that they can enjoy life in the future. Kudos to them! This is not an easy task.


But, is it the right goal to strive for? There should be an alternate mental model to think about money and financial independence.


Financial independence is an end goal, but financial freedom is a continuum. Financial freedom means you have enough capital to spend for a period of time without having to do or not do something you don’t want to. You are ‘somewhat’ free from having to worry about money. The difference between financial freedom vs financial independence is: freedom is being free for a period of time, while independence is being free forever (not having to work ever again.) The continuum looks like this:

Financial Freedom is a Continuum

Take a calculated risk for an outsized return

Instead of striving for financial independence, we should strive for financial freedom. Why do I say this? Because there is a faster way to get to financial independence. Like all things, the return you get is correlated to the level of risk you’re taking. To increase your income, you need to increase the return per hour of work that you put in. And to do that, you need to ‘increase leverage.’


Increase leverage → Increase return per hour of work → Increase income


That leverage can take many forms. Tweaking Naval Ravikant’s thoughts on leverage, (in humble opinion) I think leverage comes from three sources:

  1. Knowledge: Using capital to acquire more skill. A formal degree is a subset of this, but the most distinct form of knowledge is specialized knowledge, knowledge, or skill that can be honed through mentorship or rigorous training where imitation is hard.

  2. Capital: Using capital to acquire more capital. This is essentially investing.

  3. Starting a business: Using capital and (a lot of) skill to produce something that can be exchanged for more capital. The most capital efficient and scalable businesses are technology and content because you only need a few people, lines of code, and you can sell your product globally without having to invest a large amount of capital like traditional businesses.

Different types of ‘leverage’ encompass different levels of risk (knowledge being the least risky and starting a business being the riskiest.) The level of risk - in turn - determines the amount of return you can expect as well.


Now, to take that risk, you need some kind of buffer that allows you to explore areas that you’re interested in without having to worry about basic financial needs (that’s where financial freedom comes in.) Once you have the essential amount of capital to cover 24-36 months of expenses, you can use that capital and time to generate an outsized return by taking a calculated risk. The amount of buffer you need depends on 1) how long you want to spend exploring; and 2) how long you think you’ll take to find a job if all things fail.


As opposed to the consistent income-expense profile from a corporate job (depicted above), leverage allows you to tilt your income-expense profile to be like this:

Income-Expense Ratio of a Job with Leverage

The amount of buffer you have also determines the level of risk you can take:

Financial Freedom determines your risk-taking ability

A mental model to make the tradeoff between financial vs career freedom

For most of us, we are often presented with a tradeoff between financial freedom vs career freedom. If you’re just starting off your career, you should optimize for financial freedom. Once you have the financial freedom as a buffer, you can then use that capital to optimize for career freedom.


The goal is to use that career freedom to take a calculated risk that generates an outsized return so that you can achieve financial independence faster. Like everything else, there is a risk that you will fail and that you might have to go back to a steady paying and moderately satisfying job. But, this pursuit would have allowed you to:

  • Enjoy life and do what you are passionate about;

  • Use the financial freedom for life’s tuitions (e.g. learn how to fish) which can benefit you in your future career; and

  • Explore your fullest potential.


This is a generalized mental model, the way you apply it depends on your risk appetite and stage of life. If you have financial freedom late in life (e.g. when you already have a family or kids), your risk appetite will be lower. On the other hand, if you have financial freedom early in life, your risk appetite will be higher. The more capital you have, the more buffer, hence risk tolerance, you have.


Successful entrepreneurs, or those who have honed their skills in specific areas and made a fortune before, are generally willing to bet all-in because they know that they have the ability to recoup that capital again. In contrast, people who got capital from windfalls (capital you get from being lucky, e.g. lottery or inheritance) should not be risking all-in because they might not be able to make that money again. If that's the case for you, that capital is best spent on life’s tuitions so that one day they can use that skills to generate more capital.

Thanks my best friend Jin Sirichokchatchawan for the feedback, Simon Torring & Felix Feng for the conversations that led to this post.


Photo by Eneko Uruñuela on Unsplash

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