If things you thought were true were actually false, when would you want to know?
When I was a kid, I remember my mother saying that drunk driving was illegal. For many years after that, whenever I saw someone drinking soda while driving, I assumed they were criminals. Years later, I realized that my mother was talking about drinking alcohol while driving.
I can laugh at the absurdity of this today, but it’s the perfect example of how easy it is to carry half-truths when you don’t know what you don’t know.
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Many people go through life believing things without ever considering the possibility that those things are actually untrue. I see it everyday in almost every conversation I have with people: the misinterpretation of financial terms, the misapplication of various wealth management strategies, and confusion about the level of risk they are actually taking.
Why does this happen? Well, the Internet gives everyone instant access to an unlimited amount of information. Unfortunately, there is rarely a context, and we as humans tend to process information as true or false based on the source and a basic understanding of the topic. If Google says so, then it must be true! As a result, people end up with a false sense of confidence and a long list of beliefs that aren’t necessarily true.
Misconceptions have costly consequences
Your financial future hinges on your understanding of what you’re doing and why you’re doing it, and the consequences are real. Any misconceptions you may have about money could potentially destroy your quality of life and reduce your chances of experiencing true financial freedom.
The biggest hurdle to unlearning something you’ve always thought to be true is accepting the possibility of having inaccurate information. Once you’ve done that, unlearning bad financial information isn’t as complicated as you might think.
The biggest misconception I see over and over again is the emphasis on accumulation. People tend to gauge their progress or level of financial success by how much money they accumulate. While having money in the bank is important, reliable cash flow should be the ultimate goal.
Think about it: you can survive without accumulating money, but you can’t easily get by without cash flow. Cash flow can be generated in many ways: a paycheck from your job, a business you own, or a source of passive income. No matter where it comes from, cash flow is like water – you simply can’t survive without it. (To see some strategies for increasing cash flow in retirement, check out my Cash flow guide (opens in a new tab).)
How to know if your money is serving its primary purpose
Money is obviously a big part of our lives, so we tend to crave more of it. But how do you decide how much is enough?
What I find is that people often use account balances and arbitrary rates of return to gauge how much progress they’ve made, but none of these really indicate whether your money is serving its primary purpose: income replacement, also known as cash flow.
Although money is of course part of the equation, it is not the right measure of success. Many people who have a lot of money still struggle with not feeling financially free or confident, and that’s a problem.
To gain financial confidence, you must first answer these two questions:
- What real income do you have right now that you don’t have to work to receive? I’m talking about actual dollars deposited into your checking account or brokerage account.
- If you stopped working 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 the income you receive and the amount you need. (That’s why you work, to fill that gap.) If you want to stop working, you’ll have to find a way to fill that gap with passive income.
How is financial security different from financial freedom?
So how do you do this? Start by understanding the difference between financial security and financial freedom.
The idea of financial security cannot necessarily be defined by exact numbers or percentages and is often expressed as a feeling of security. This is why most people focus on debt reduction and money accumulation. They believe that spending less, paying less interest and earning more on their investments 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’re like most people, knowing creates more confidence than guessing, and a good way to find out is to fill out a Gap Report™. (Get your GAP Report™ here (opens in a new tab).)
Security vs independence vs freedom
I speak with people every week who have saved millions of dollars but don’t feel financially free. They say things like “I think everything will be fine” or “I feel good with what I have”, but their choice of words – “I think” and “I feel” – say it all: they are not confident.
In short, if you have large sums of money, but are still working to meet your income needs, are worried about market returns, or are uncertain about the future…this is not the freedom.
There is a middle ground where you have both financial security and short-term lifestyle flexibility, which I call “financial independence.” For example, many business owners have businesses or real estate that create a source of income. Their business operates without their full attention, allowing them to do what they want when they want, but they still have to contribute at some level in order to maintain their sources of income.
Rental properties are the perfect example of great cash flow machines that generate income to potentially support your lifestyle and help you achieve financial independence. It’s obviously a good thing for these assets to grow and generate income, but it still takes time and effort.
You may have a good life collecting rent from your tenants, but just the fact that you have to collect it is work, not to mention repairs and maintenance, managing expenses and (worst of all ) management of disgruntled people.
There’s nothing wrong with running a business to provide cash flow. For some people, their business is their passion, but it’s hard to achieve true financial freedom when business income depends on your presence.
This is why many people who have sizable rental properties often cash in and turn to passive income sources – because they want true financial freedom.
A true source of passive income is one where you don’t have to do anything to generate it, including Social Security, pensions, annuities, private markets, and royalties.
Now, we can discuss definitions of financial security versus independence versus freedom, but that would be missing the point.
Passive income is the path to financial freedom
Not understanding the differences has a cost. If the goal is to have enough passive income to cover your cash flow needs, why would you spend over thirty years measuring your progress by account balances and rates of return?
As you can see, words matter and definitions matter. These conflicting ideas could be why so many people think they are on the path to freedom but never seem to achieve it. They don’t reach the goal because they don’t really understand what it takes to have financial freedom and are determined to accumulate assets.
To have financial freedom, you must have passive income. If you must have passive income, focus on building reliable sources of income. It’s as simple as that.
For more information on creating passive income and achieving financial freedom, visit brianskrobonja.com.
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The information and opinions contained herein are provided by third parties and have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. They are given for informational purposes only and do not constitute a solicitation to buy or sell any of the products mentioned. The information is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation.
The appearances in Kiplinger were obtained through a public relations program. The columnist received assistance from a public relations firm to prepare this article for submission to Kiplinger.com (opens in a new tab). Kiplinger was not compensated in any way. The views and opinions expressed by Brian Skrobonja are those of the authors and do not necessarily reflect the official policy or position of Kiplinger, AE Wealth Management LLC or Madison Avenue Securities, LLC.
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