I talk to people who tell me ‘I want to be rich’, and so I share with them the financial planning path that, if you start along it early, and with a few tweaks, could allow you to at least retire with a good sum of money after many years of work. But then they say to me,

‘That’s too far away, I want to be rich much sooner.’

And I say,

‘Okay, so you want to be rich, but only if you can do it quickly?’

Then I share with them an ‘entrepreneurial path’ that could see them rich in a couple of years. But they say to me,

‘That sounds too risky.’

So I say to them,

‘Okay, so you want to be rich, but only if you can do it quickly, and with no risk?’

Then I share with them an accelerated ‘earn-save-invest path’ that requires that they get the highest pay they can, do the most overtime, save the most amount of money possible, invest every cent and postpone any luxuries like a nice home, car or hobbies and, with only a bit of luck, they can be rich within 5 to 10 years with little risk. Then they say to me,

‘That sounds too hard’

to which I say,

‘Okay … so you want to be rich, but only if you can do it quickly, without any risk, or without too much effort … are you sure you really want to be rich?’

We saw earlier that values are subconsciously desired states or feelings, not to be confused with things that you consciously value having or doing. Because of this it’s not obvious to most people what it is they value. I touched on this with Andrew, who consciously identified very strongly with wanting to be financially free, but seemed unaware of why he remained stuck where he was.

When I put my question to him about whether he could stand being his own boss, even wealthy, if it meant doing so in a ‘low status’ or anonymous business, what I was doing was a kind of values audit.

Identifying your hierarchy

I had done the same with Melissa when I’d caught up for lunch with her, and her answers were part of the reason I’d agreed to help her. I saw that, like me, she valued her freedom in a lot of situations where others might value security, but she hadn’t yet made freedom a Dominant Value. It’s hard to have trust in valuing something like freedom, when our whole society is set up to actively encourage you to value something different.

Even without having someone ask you challenging questions, you can often determine your own values by asking yourself questions, or listening to the way you speak.

Let’s look at two people who feel that they would like to not have to work a job for life and are consciously interested in the idea of starting a business.

‘I can’t stand my job. I’d like to be freer, be my own boss; but I’m secure here and I need the salary if I want to save for retirement. Besides, that sounds risky …’

This person’s values hierarchy might look like this:

1. security.
2. comfort.
3. freedom.

‘I want to be financially free! Let’s do this! I’ve got a job that pays well, but I could see myself running a successful company. I pride myself on hard work. But I don’t want to start a small business; what if I got stuck working for clients and never made it big?’

This person’s top three values might be:

1. status.
2. freedom.
3. comfort.

Values hierarchies are simply revealed preferences. Once you identify someone’s values you can really start to see what makes them tick.

We established earlier that freedom is a unique value to hold to help you move towards financial freedom — by making each step you take rewarding in and of itself — so what should you do if you want to be financially free but you suspect freedom may not be your Dominant Value?

Start valuing freedom

If you don’t naturally value freedom, that’s okay — you’re normal. I’m the one who’s not! Here’s how to start.

It’s amazing how much the status of being a homeowner can cost you

I’d warned Melissa a month earlier when we’d met for coffee that I saw a correction coming, that even though she was working in real estate she shouldn’t feel too pressured to buy a home straight away — especially when doing so would really stretch her financially and commit her to a job she didn’t really love.

‘Our houses are such unwieldy property that we are often imprisoned rather than housed in them.’

Henry David Thoreau, Walden

Looking back now, it’s hard to remember just how strong the idea was that property would always go up and the grip it had on people’s minds in 2007.

Which is why I wasn’t really surprised by the topic of conversation when I next caught up with Andrew.

The last time Andrew and I had talked, I’d asked him the question about being the ‘paper king’ of Brisbane.

And it was clear he’d been giving it some thought. Did he want to commit to his part-time business with the risk that it might never be a huge success, or did he want to commit to the corporate path and the rise in status and income he hoped it would bring?

When Andrew told me he was thinking of moving to the coast to join another team and work for a promotion, finally committing to the ‘job for life’ path, I wasn’t surprised. But I was surprised by how ferociously he was planning on committing to it. Convinced that property would double in value every seven years, Andrew confided that he was thinking of selling the unit he lived in and buying the most expensive house down the coast he could afford with the proceeds.

If he could scrape together enough deposit and stretch his borrowing capacity to the max (and beyond) he could maybe secure a property worth up to $1 million. While he would need every cent of his new salary (if he could get the promotion) and would be dependent on the job, if all went to plan he would be a millionaire in seven years … or so he believed.

Needless to say I had my doubts. And the thought of my friend taking out a massive loan at this stage of the game was worrying to me.

I’d lived through and directly experienced markets that went up, went down, and even stayed flat for years. You could say that by living outside ‘the system’ I was more in touch with the nature, or the seasons, of the economy. I had grave concerns about the demographic effects that the baby boomers retiring would have on a market that had been artificially inflated for decades.

I’d shared those concerns with Andrew in the past, when I’d thought the correction might come at the end of the decade. But after my experience with the stock market correction on the day I’d met with Melissa, my concerns were growing that it may come earlier. While stocks were still rising and everyone had forgotten the correction of two months earlier, I could see that volatility was rising — a worrying signal that often precedes major changes in the market’s direction.

Instead of suggesting he abandon his plan, I put it to Andrew that he might want to sell his unit first, since prices were so high, and go back to renting while he contemplated his move and got to know his new market better, giving him a chance to perhaps shop for a better deal.

But he was dead set against the idea of sitting out of the market for any period of time, pointing out how much prices had risen and the cost that may come from waiting to buy.

Although he was technically right — sitting out of a roaring market could cost you money (provided you sold before the party ended) — I sensed that there was something else behind his reluctance to sell and rent for a period of time.

The status ladder

I’ve never really been motivated by traditional notions of status. But that’s not because I care less about it than other people so much as I’m prepared to define it differently. People want to be able to evaluate others quickly, which is why when I first retired and someone would ask me what I did for a living, it felt weird and even pompous to say I invested for a living, while I was still in my twenties. After a while, though, I became comfortable with defying expectations, and I went through a stage where I would answer ‘nothing’ or even ‘I’m unemployed’, which was technically true because nobody employed me. It was a real eye opener to see people falling into a stereotype reaction.

There used to be one general social path that everyone could realistically expect to be able to follow, that would guarantee them a level of status and recognition in their communities.

Finish school, get a first job, leave home, get married, buy a home, have kids, get promoted, buy some investments and eventually retire.

Each level of the status ladder was a little higher than the previous one. A married person was considered more adult than a single person; someone working a job was a little more advanced than someone still at school. A home owner was better than a renter and somebody who owned investments like property was well on their way to being a senior person in society. In recent years it seems we’ve deprioritised social steps on the ladder, but the economic steps have become more important than ever, even as they have become harder to achieve. What I learned about status is that it is relative. It’s different based on what culture or even time period you lived in. And in our culture it’s still in the process of changing.

Status, property and tax

Not only does society reward certain paths, it rewards certain behaviours. In particular in the Anglosphere/Western countries there seems to be a particular obsession with home ownership as something eminently desirable. Because of this, we tend to find that governments reward home ownership and property investing with all sorts of incentives.

For example, in Australia we encourage people to own their own homes and pay them off by offering capital gains tax deductions for home owners.

• Home owners can’t deduct their mortgage interest payments, but they can exempt all of their capital gains on the property when they sell.
• Property investors, on the other hand, can deduct their mortgage interest payments on their rental properties, but can only claim a 50 per cent deduction on their capital gains when they sell (and only if they’ve held the property for more than 12 months).

While the rules are slightly different among developed countries, the principle is the same. Most don’t allow an interest deduction on personal loans, so countries that allow a home mortgage interest deduction have created exceptions to those rules.

Generally, people buy homes to live in before they buy homes for investment. And, in the past, most would have started doing this earlier in life, giving them more years to accumulate capital gains.

Australia’s zero per cent tax on capital gains for home owners encourages people to ‘trade up’ their homes over time, starting a cycle of buying and selling for the rest of their lives.

On the other hand, most people don’t get around to buying investment properties until later in life when they are earning higher incomes, so they are incentivised to buy investment properties with a deduction against their high incomes instead.

But what if you could get the best of both worlds, tax-wise, by not following the typical status path, and instead skipping ahead a few rungs on the status ladder?

Instead of starting out as a home owner, why not start as a property investor? If your first property is an investment, you can get on the property ladder sooner too. It’s easier to buy a cheaper house earlier if you buy it as an investment property, than a house you might choose to call a home.

This is exactly what I did; the first house I bought was an investment, not a home — and so I shared with Andrew the six-year rule.

Another advantage of having an investment for a first property, is that if you are renting where you live and you run a business from home, you can deduct part of your rent as a business expense. Now, you can do that too if you own your own home and live in it (as a PPR) by deducting a part of your mortgage payment, but in that case you might lose your entitlement to claim the home ownership capital gains tax deduction in full, which is the major tax break for owning your own home.

So, in most cases, people who work from their home (that they own) are better off not taking a deduction against their mortgage for their home business so they don’t lose out on the tax-free capital gains when they sell.

But this strategy allows you to make that deduction too: you end up making mortgage deductions (on your investment property), capital gains tax deductions (on your investment property, which is nominated as a PPR for the tax period), and the full home business deductions you are allowed out of the rent you pay on the rental property you actually live in.

Tax advantages tend to favour the free more than they favour the rich.

Although you may have never heard of this strategy, I don’t want to give the impression that the ‘tax secrets’ of the rich are special deductions or special techniques that only the wealthy have access to. There are plenty of highly paid salaried employees who don’t really have a lot of options when it comes to tax time, aside from negative gearing.

In fact, if anything, tax advantages tend to favour the free more than they favour the rich.

So I was able to convince Andrew to hold off on leveraging himself to the hilt. By not selling his property he would still have exposure to a rising market, and, by moving out and renting for a while and turning the property he owned into an investment, he would not only be saving on closing costs, he would be able to start to deduct his mortgage interest payments on his property too. Instead of giving up on his part-time business he’d be able to start claiming business expenses against his new rent and come out more than $8000 a year ahead in total, an improvement in his cashflow that made it that much easier for him to keep his options open.

While Andrew had contemplated pursuing status that costs freedom, perhaps now he would have the chance to instead experience how valuing freedom ahead of status could not only make him richer — as his increased cash flow was already proving — but by redefining status through freedom he might see that as a business owner and property investor he could meet his needs for status, without sacrificing his freedom at all.

Status through freedom

There’s nothing wrong with valuing things like status, security, belonging, even to an extent power — we are, after all, socially evolved creatures.

The distinction comes in what relative importance we place on each of them. And how we define them.

If you find from looking at your own values hierarchy that you tend to be dominant in other values, for example status — even though what you consciously want is freedom — then you need to find a way that freedom itself can represent status to you.

You’d be surprised by how envious people are of those who are in the position of not having to answer to a boss, of being able to set their own hours. As work creeps further and further into our private lives, being able to control when, and how, and if you work, is a genuine luxury.

In fact, a very good case can be made that time is the only really limited resource in our lives.

In a world where the vast majority of people are employees, why are we all competing so hard to have slightly better jobs, when we could put ourselves in a totally different category from nearly everyone else by not having a job at all? Some people are sidestepping the ‘status’ of having a first job and going straight for the status of being self-employed; while others are questioning the need to enslave yourself to debt for the status of being a ‘home owner’ when you can start out with the status of ‘property investor’.

Like the Red Queen’s race in Through the Looking-Glass (where ‘it takes all the running you can do, to keep in the same place’), in a world where people are working harder than ever just to stay the same, having more time and having more options is the new status indicator.

Why not set yourself free and leapfrog ahead on the status ladder?

Finally, to really start to value freedom first, you may have to get free first. Sometimes you have to try something if you are going to develop a taste for it and experience a little of something before you can really value it.

In part II I’ll explain the ways in which you are holding yourself back, without even realising it, by not being free.

‘So what do you think is my Dominant Value? Do I even have one?’ Melissa asked.

‘That’s a good question. The average person may change what they value over time, at different stages of life. Freedom is often dominant in the late teenage years as people get fed up living at home and want to move out into the world, make their own decisions and lead their own life.

‘As people get older they tend to value security more, and so on. But even with those average trends most people tend to keep coming back to one or two values that dominate, and if there is ever a situation that forces you to choose, you’ll see what’s more dominant.

‘It’s really the situations you find yourself in and how you choose to respond to them that can show you what you really value. You said something the other week about having had a few jobs?’

‘Yeah, I find I get restless if a job isn’t going anywhere. I’ve never been fired — I work hard and I’ve always received great references; in fact, every new job I’ve taken has paid better than the last so I guess I’m doing something right. It’s just that I missed out on the whole degree path. My parents were going through a messy divorce and by the time I was in senior school the situation was intolerable and I moved out of home, and any plans for uni fell by the wayside.’

‘That sounds rough.’

‘It’s okay, I’m over it. But what it has done is left me feeling like maybe I missed out. Like I should go back to school so I can get a better job. But it’s not like there’s anything in particular I’m dying to study.’

‘Since when does that stop anyone from going to uni anymore?’

‘Ha, true. It’s just this feeling that unless I’m signing up for the house, the mortgage, the career, I’m doing something wrong, I’m missing out.’

‘If you don’t knuckle down, take on the “responsibilities” of debt and career you might fall behind …? Well you might be happy to know that the old paths and formulas, especially the “safe secure” path, are not what they once were.’

‘Well that’s good to know, because I’ve got something to tell you. I’ve quit my job!’

This is what I feared would happen when I shared my story — how I’d taken a safe, secure profession that I’d worked hard to gain, and walked away from it to pursue freedom instead. Had I encouraged Melissa to do something reckless?

‘Okay, tell me what happened,’ I replied.

‘Well, I’d originally taken this job because the boss had offered me the chance to do marketing for the office and the chance to learn the buyer’s agent side of the business. I’d just finished my real estate licence and was looking for opportunities to use it, and the buyer’s agent side of things interested me — it was why I took this job,’ Melissa explained.

‘That’s great, so you were motivated to take the job for the opportunities it offered you, and the freedom to apply what you’d learned and to grow. That’s a good start, so what happened?’

‘Well, not long after I started there the receptionist went on extended maternity leave, and they asked me and another office girl to cover for her at first, while still doing the marketing. Before long it became obvious that I was going to be solely covering for her, she was going to be on leave for up to a year, and any hopes of getting into working as a buyer’s agent were permanently postponed. They did keep me on the same salary though,’ Melissa replied.

‘So they were prepared to pay you the same money, and technically the work you would be doing would be easier, right? And you quit. I hope you realise that that’s pretty unique — I know a bunch of people who would choose easier work for the same salary if they could.’

‘Yeah. But you had me thinking about what my values were and what I was valuing in a given situation. What I originally valued about this job was taken away, but did I value the opportunity to grow enough to do something about it?

‘You said the secret to motivation is to put pleasure in front of you and pain behind you and not get comfortable. I could see that if I let it, I’d eventually get comfortable doing the reception work and forget that I originally wanted a challenge.

‘And to be honest, the savings really helped. It’s easier to build up your frustration with a bad situation if you’re not dependent on it,’ Melissa confided.

‘It’s interesting you say that,’ I replied. ‘You’ve just identified something very important — we’ve talked a lot about getting free but there are costs to not being free that most people aren’t even aware of until it’s too late …’