If the things you think are right are actually wrong, when do you want to know?
When I was a kid, I remember my mom telling me that drinking and driving was against the law. For years after that, whenever I saw someone drinking soda while driving, I assumed it was a criminal. Many years later, I learned that my mother talked about drinking alcohol while driving.
I can laugh at the absurdity of this now, but it’s a perfect example of how easy it is to take half-truths when you don’t know what you don’t know.
Many people go through life believing things without considering the possibility that those things may actually be wrong. I see it every day in almost every conversation I have with people: misinterpretation of financial terms, misuse of various wealth strategies and confusion about how much risk they are taking.
Why did this happen? Well, the internet gives everyone instant access to unlimited information. Unfortunately, there is rarely context, and we have a tendency as humans to process information as true or false based on the source and basic understanding of the topic. If Google says it, then it must be true! As a result, people end up with a false sense of belief and a laundry list of beliefs that are not necessarily true.
Misconceptions come with costly consequences
Your financial future depends on your understanding of what you do and why you do it, and the consequences are real. Any misconceptions you have about money can potentially destroy your quality of life and reduce your chances of experiencing true financial freedom.
The biggest obstacle to unlearning something you have always thought was true is to accept the possibility of having accurate information. Once you do that, unlearning bad financial information is not as complicated as you might think.
The biggest misconception I see more and more focus on accumulation. People tend to evaluate their progress or level of financial success based on how much money they collect. While having money in the bank is important, reliable cash flow should be the ultimate goal.
Think about it: You can survive without accumulating cash, but you can’t easily survive without cash flow. Cash flow can be generated in several ways: a salary from your job, a business you own or a source of passive income. Regardless of where it comes from, cash flow is like water – you simply cannot survive without it. (To see some strategies for increasing cash flow in retirement, check me out Cash Flow Guide (opens in new tab).)
How to know if your money is meeting its primary purpose
Money is obviously a big part of our lives, so we have a tendency to want more. But how do you decide how much is enough?
What I’ve found is that people often use arbitrary account balances and rates of return to estimate how much progress they’re making, but none of these things show whether your money is serving its primary purpose: income replacement, also known as cash flow. .
While having money is, of course, part of the equation, it is the wrong measurement of success. Many people who have a lot of money still struggle and don’t feel financially free or confident, and that’s a problem.
Achieving financial confidence begins by answering these two questions:
- How much income do you actually have coming in today that you didn’t have to work to earn? I’m talking about actual dollars being deposited into your checking account or brokerage account.
- If you were to leave work tomorrow, how much money would you need to cover all your expenses? This includes taxes, travel, lifestyle expenses, etc.
If you’re like most people, there’s a gap between how much income you have and how much you need. (That’s why you work, to fill that gap.) If you want to stop working, you need to figure out how to close this gap with passive income.
How does financial security differ from financial freedom?
So, how do you do that? Start by understanding the difference between financial security and financial freedom.
The idea of financial security is not necessarily defined by exact numbers or percentages and is often expressed as a sense of security. That’s why many people focus on reducing debt and saving money. They believe that spending less, paying less interest and earning more on their investments is what will lead them to a successful retirement.
Having a large amount of money brings a sense of financial security, but it does not create financial freedom. If you’re like most people, knowing creates more confidence than assuming, and a great way to find out is to complete the Gap Report™. (Get your GAP™ Report Here you go (opens in new tab).)
Security vs freedom vs freedom
I talk to people every week who have millions of dollars saved but do not feel financially free. They say things like, “I think I’ll be OK,” or “I feel OK with what I have,” but their choice of words – “I think” and “I feel” – say it all: They don’t believe in themselves.
In short, if you have a lot of money, but you still work to support your income needs, worry about market results or are uncertain about the future… that is not freedom.
There is a middle ground where you have financial security and lifestyle flexibility in the short term, which I call “financial independence.” For example, many business owners own a company or real estate that creates an income stream. The business is run without full attention, allowing them the flexibility to do what they want when they want, but they still need to contribute at some level to maintain their source of income.
rental properties is a perfect example of a great cash flow machine that generates income to potentially support your lifestyle and help you achieve financial independence. This is obviously a good thing to have these assets to grow and generate income, but it still takes time and effort.
You can have a pretty great life collecting rent from your tenants, but the simple fact is that you have to collect it is work, not to mention fixing repairs and maintenance, managing expenses and (worst of all) dealing with unhappy people.
There is nothing wrong with running a business to provide cash flow. For some people, the business is a passion, but it is difficult to achieve true financial freedom when the income of the business relies on you to appear.
This is why many people who own a decent rental property often cash out and switch to a passive income source – because they want true financial freedom.
True sources of passive income are those where you don’t have to do anything to generate it, including Social Security, pensions, annuities, private markets and royalties.
Now, we could argue about the definition of financial security vs. independence vs. freedom, but that would be missing the point.
Passive income is the path to financial freedom
Failing to understand the difference has a cost. If the point is to have enough passive income to cover your cash flow needs, why would you spend thirty-plus years measuring your progress based on account balances and return rates?
As you can see, words are important, and definitions are important. These conflicting ideas may be why many people think they are on the road to freedom but never seem to reach it. They fail to achieve their goals because they don’t really understand what it takes to have financial freedom and persevere in accumulating assets.
To have financial freedom, you must have passive income. If you must have passive income, then focus on building a reliable source of income. It is very simple.
For more information on creating passive income and achieving financial freedom, visit brianskrobonja.com.
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