If the things you thought were true were actually wrong, when do you want to know?
When I was a kid, I remember my mother saying that drinking and driving was against the law. For many years after that, whenever I saw someone drinking soda while driving, I would assume they were criminals. Years later, I found out that my mother was talking about drinking alcohol while driving.
I can laugh at the absurdity of this day, but it’s the perfect example of how easy it is to hold half-truths when you don’t know what you don’t know.
A lot of people go through their lives believing things without even thinking about the possibility that those things are actually wrong. I see it every day in almost every conversation I have with people: misinterpretation of financial terms, misapplication of various wealth strategies and confusion about how much risk they are actually taking.
Why does this happen? Well, the Internet gives everyone instant access to unlimited amounts of information. Unfortunately, there is rarely any context, and we as humans tend to treat information as true or false based on the source and basic understanding of the topic. If Google says it, it must be true! As a result, people end up with a false sense of confidence 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 misinterpretations you might have about money could destroy your quality of life and reduce your chances of experiencing true financial freedom.
The biggest obstacle to unlearning something you’ve always thought was true is accepting that there may be inaccurate information. Once you do that, getting rid of bad financial information is not as complicated as you think.
The biggest misunderstanding I see over and over again is to focus on accumulation. People tend to rate their progress or level of financial success based on how much money they collect. While having money in the bank is important, a reliable cash flow should be the end goal.
Think about it: You can survive without any money accumulated, but you cannot easily live without cash flow. Cash flow can be generated in any number of ways: a paycheck from your job, a business you own, or passive income source. No matter where it comes from, cash flow is like water – you simply can’t survive without it. (For some strategies to increase cash flow in retirement, check out my cash flow guide (Opens in a new tab).)
How do you know if your money is fulfilling its primary purpose
Money is obviously a huge part of our lives, so we have a tendency to crave more of it. 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 assess how much progress they’ve made, but neither of those things actually indicate whether your money is fulfilling its primary purpose: to replace income, aka cash flow.
While having money is of course part of the equation, it is a wrong measure of success. A lot of people with a lot of money still struggle with not feeling financial freedom or confidence, and that’s a problem.
Achieving financial confidence begins with answering these two questions:
- How much actual income are you getting now that you don’t have to work to receive? I’m talking about actual dollars being deposited into your checking account or brokerage account.
- If you stop working tomorrow, how much will you need to cover all your expenses? This includes taxes, trips, lifestyle expenses, etc.
If you are like most people, there is a gap between how much income you get and how much you need. (That’s why it works, to fill that gap). If you want to stop working, you’ll need to know how to bridge that gap with passive income.
How is financial security different 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 cannot necessarily be defined in exact numbers or percentages, and is often expressed as a feeling of security. That’s why most people focus on reducing debt and accumulating money. They believe that spending less, paying less interest, and earning more from their investment is what will lead them to a successful retirement.
Having large sums of money brings a sense of financial security, but it does not create financial freedom. If you are like most people, knowledge creates more confidence than assumption, and a good way to know is to complete the Gap Report™. (Get your own GAP™ report over here (Opens in a new tab).)
Security vs. Independence vs. Freedom
I talk to people every week who have millions of dollars but I don’t feel like it financially free. They say things like, “I think I’ll be fine,” or “I feel good about what I have,” but their word choices — “I think” and “I feel” — say it all: They’re not confident.
In short, if you have large sums of money, but are still working to support your income needs, worried about market returns or uncertain about the future…this is not freedom.
There is a middle ground where you have both financial security and lifestyle flexibility in the short term, which I refer to as “financial independence.” For example, many business owners own businesses or real estate that create a revenue stream. Their business operates without their full attention, which gives them the flexibility to do what they want when they want, but they still have to contribute at a certain level in order to maintain their sources of income.
rental property They are the perfect example of great income generating cash flow machines to support your lifestyle and help you achieve financial independence. Obviously, it’s a good thing for these assets to grow and generate income, but it still takes time and effort.
You may have a pretty great life collecting rent from your tenants, but the simple fact that you have to collect it is work, not to mention handling 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, their work is their passion, but true financial freedom is hard to achieve when business income depends on your back.
This is why many people with large rental properties often take advantage and turn to passive income sources – because they want real financial freedom.
The real source of passive income is the one where you don’t have to do anything to generate it, including Social Security, annuities, annuities, private markets, and royalties.
Now, we can argue about definitions of financial security versus independence versus freedom, but that might miss the point.
Passive income is the path to financial freedom
Failure to understand the differences has a cost. If the goal is to have enough passive income to cover your cash flow needs, why spend more than thirty years measuring your progress based on account balances and rates of return?
As you can see, words matter and definitions matter. These conflicting ideas may be the reason why many people think they are on their way to achieving freedom but never seem to reach it. They fall short of the goal because they don’t really understand what is required to have financial freedom and they are persistent in accumulating assets.
In order to enjoy financial freedom, you must have passive income. If you must have passive income, focus on building reliable sources of income. It’s that simple.
For more information on creating passive income and achieving financial freedom, visit brianskrobonja.com.
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