Escape velocity refers to the speed a ballistic projectile needs in order to escape a gravity well. When hearing the term, most people will think about a rocket escaping the atmosphere of the Earth. As a concept, escape velocity can be applied to different aspects of life.
The way I see it, a good way to describe escape velocity is breaking through the obstacles that are keeping you tied down. As soon as those obstacles are broken, the following progress is astounding. It is like looking at an exponential curve. The reason for this is that, given the amount of effort being expended is the same, effort that was previously being spent dealing with obstacles is now being spent working toward a goal.
Most of us have seen it on a short scale playing video games. I've included a link to a game called The Last Stand. The Last Stand is a simple flash based game where you have to survive 20 days fighting off zombies. All you have is a barricade, some weapons, and some companions in order to make it through the night. If the zombies break your barricade, you have a few moments before they kill you.
You start the game with only yourself and a handgun. As the nights progress, you have three options to choose from. You have to decide how much time you spend repairing your barricade, searching for survivors, and looking for new weapons. To beat the game easily, you want to make sure to get as many other survivors as soon as possible for one very key reason. The more survivors you have, the more effective you can repair the barricade. Time is your limited resource.
Just by yourself, you can repair 5% of the barricade per hour, however every extra survivor will allow you to repair an extra 5% per hour. If you have 7 survivors, you can repair 35% of the barricade per hour. The other survivors also fight along side with you and make it less likely to get overwhelmed by enemies which break down the barricade.
Playing the game only on your own with just the handgun, it is easy for several rushing zombies to cause severe damage to the barrier. If the barricade gets knocked down to 50%, you have to spend 10 hours repairing it leaving only 2 hours to look for better guns or allies.
Enough about games.
When it comes to personal finance, there are three places I can think of where you want to achieve escape velocity.
The first place is making sure you spend less money than you make. If you are spending more money than you make, this means that you are borrowing money and borrowing money isn't free. Usually, borrowing money isn't even cheap. The worst place to see this happen is consumer debt. It is credit card debt. Credit card debt usually carries an interest rate of 12 to 20 percent. To put this into perspective, 20% off of $10,000 credit card balance for a year is $2,000 of interest. This $2,000 is being paid in order to allow a man to carry $10,000 of credit card debt. When a man starts spending less money than he makes, he has the option to use extra money to pay off debts to reduce the amount of interest being paid.
The second place of seeing escape velocity is when all debts are paid off. For example, say a man has been paying $1,000 each month on a mortgage and the mortgage is his only debt. After his house is paid off, he is still working his corporate job but no longer has to pay $1,000 a month on his house. The man has the option to take that $1,000 and throw it into saving or investments. If the man was only saving $200 a month while he had the mortgage, his is now saving $1,200 after the mortgage.
The third place of seeing escape velocity is when passive income or investment income becomes greater than your living expenses. If a man is consistently making $16,000 a year on passive or investment income and his total living expenses are only $15,000, he does not need a job in the corporate world in order to sustain his standard of living. He has the option to be free and pursue whatever it is his heart desires.
In order to achieve escape velocity, it is very helpful to prefer minimalism. The cheaper it is that you live, the less money you need to make in order to sustain your standard of living. More on that later though.
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