The Three Escape Velocities of Money
On a pleasant after-dinner walk one warm evening not long ago, I had the unexpected pleasure of watching a rocket launch. It soared majestically above the horizon, piercing the sky and leaving the atmosphere within moments. This serendipitous experience made me reflect on the concept of escape velocity—a term from physics that rockets, and metaphorically, we too, can achieve with our finances. Let me explain.
In simple terms, escape velocity in celestial mechanics is the minimum speed needed for an object to break free from a planet's gravitational pull. Before I discovered investing, I was captivated by physics, and I've always found parallels between the two.
In the context of wealth, some define financial independence as reaching a personal escape velocity, but I'd like to propose three different perspectives on this concept.
The first is spending less than you earn and consistently saving. This initial step is crucial for building or preserving wealth, though I recognize it’s easier said than done. At any income level, there are always new temptations to spend more—whether on homes, cars, travel, or other lifestyle upgrades.
Sometimes, we even spend money we haven’t earned yet. But if wealth accumulation is our goal, we must let our spending fall behind our rising income. As Charlie Munger famously noted, saving the first $100,000 is the hardest part; it gets easier after that. By doing so, we escape the cycle of living paycheck to paycheck.
The second moment of escape occurs when your investments earn more through dividends and appreciation than your job or business does in a given year. This is a life-changing realization, akin to having a second self working alongside you, doubling your efforts.
Until this point, many of us believe we must work our way to riches, and that’s a great starting point. But when your capital starts working harder than your paycheck, a new chapter begins. You shift from merely selling your time and skills to having your capital work for you. As Warren Buffett puts it, you’re now making money in your sleep. This is the moment you escape the cycle of trading time for money.
The third level of escape velocity is reached when your investments generate more income than you need to cover your annual expenses. At this stage, work becomes optional, and you achieve financial freedom.
Another way to view this is by considering how many years of expenses your savings or capital represent. A common rule of thumb is 25 years, assuming a 4% annual withdrawal rate. However, if a higher number makes you more comfortable, that’s perfectly fine, too.
As exhilarating as it is to see your capital outpace your earned income, what follows is even more exciting. Your investment returns reach a level where your wealth continues to grow, even without another paycheck. This is when you escape the work-to-live cycle.
But the journey doesn’t end there. As compounding continues, your wealth can multiply far beyond your immediate needs, potentially supporting many lifetimes of expenses.
In my 100 podcast conversations with experts in money, investing, and wealth from around the world, we often conclude by recognizing time as the ultimate form of wealth. The ability to spend your time as you choose is true freedom. John Soforic, the author of The Wealthy Gardener, told me that being able to take a walk in the middle of the day symbolizes this freedom for him.
Once you reach the third escape velocity, you gain choices, options, and freedom—just like that rocket headed far into space. Whether you’re already there or on your way, I wish you the best of luck on your journey.
Happy Investing!
Bogumil Baranowski
Disclosure:
Blue Infinitas Capital, LLC is a registered investment adviser. The information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.