Financial Freedom in Retirement Is All About Cash Flow
Mar. 20, 2023 Kiplinger
If things you thought were true were actually wrong, when would you want to know?
When I was a child, I recall my mother saying that drinking and driving was against the law. For many years after that, whenever I saw someone drinking a soda while driving, I assumed they were criminals. Years later, I figured out that my mother was talking about drinking alcohol while driving.
I can laugh at the absurdity of this today, but it is the perfect example of how easy it can be to carry around half-truths when you don’t know what you don’t know.
Many people go through life believing things without ever considering the possibility that those things are actually wrong. I see it every day in nearly every conversation I have with people: the misinterpretation of financial terms, the 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 have a tendency as human beings to process information as true or false based on the source and a 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 confidence and a laundry list of beliefs that aren’t necessarily true.
Misconceptions come with costly consequences
Your financial future rests on your understanding of what you’re doing and why you’re doing it, and the consequences are real. Any misinterpretations you may have about money could 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 inaccurate information. Once you do that, unlearning bad financial information is not as complicated as you may think.
The biggest misconception I see over and over again is the focus on accumulation. People tend to evaluate their progress or level of financial success based on 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 any money accumulated, but you cannot easily get by without cash flow. Cash flow can be generated in any number of ways: a paycheck from your job, a business you own or a passive-income source. Regardless of where it comes from, cash flow is like water – you simply cannot survive without it.
How to know if your money is fulfilling its primary purpose
Money is obviously a big part of our lives, so we have a tendency to desire more of it. But how do you decide how much is enough?
What I find is that people often use arbitrary account balances and rates of return to assess how much progress they have made, but neither of these things actually indicates whether your money is fulfilling 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 for success. A lot of people with plenty of money still struggle with not feeling financially free or confident, and that is a problem.
Achieving financial confidence starts with answering these two questions:
- How much actual income do you have coming in right now that you don’t have to work to receive? I am talking about actual dollars being deposited into your checking account or brokerage account.
- If you quit working tomorrow, how much money would you need to cover all of your expenses? This includes taxes, trips, lifestyle expenses, etc.
If you’re like most people, there is a gap between how much income you’re receiving and how much you need. (That is why you work, to fill that gap.) If you want to stop working, you’ll need to figure out how to close this 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 by exact numbers or percentages and is often expressed as a feeling of safety. That’s why most people focus on reducing debt and accumulating money. They believe that spending less, paying less in 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 assuming, and a good way to know is to complete a Gap Report™.