If you had to make the choice between being Rich or being Financially independent which would you choose?
The true answer is simple and complicated at the same time.
How being Rich and Financially Independent are different
When it comes to getting Rich & Financially independent most people would tell you that they are the same, but they aren’t.
If you won the lottery tomorrow a lot of people would say you’re Rich and that you can retire. This comment is only half true. Yes – you might be rich, but you won’t be financially independent … not without a strategy.
Getting rich today isn’t the hardest thing to do. In fact being a millionaire isn’t truly a big deal. Becoming a multi-millionaire is a bigger deal. Achieving Financial Independence is the biggest deal.
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You see getting Rich today is more to do with what you own (Assets) while financial independence, is about how much you can earn with the least amount of effort. (Cash Flow)
So what is financial Independence?
net passive income ≫ total cost of lifestyle
Where the money that you earn passively ‘significantly’ outweighs the cost of your lifestyle. i.e. being able to do whatever you like, whenever you like and being able to do it.
Unfortunately below is how we can describe most financial situations.
net active income ≤ cost of survival
Where the job you work at will give you just enough to survive, but not enough to do what you want.
The big opportunities – Property and Stocks
As I said earlier being a millionaire isn’t a big deal anymore. If you were able to buy a property 10 years ago then its growth rate would likely have doubled its value. Your property could be worth a million bucks.
If you did this 20 years ago, then the chances of being a millionaire are pretty good.
But … are you still going to work each and every day?
If you’ve been able to call yourself a home owner for the last decade and you’re still going to work then you’ll be able to appreciate what it means to be ‘Asset Rich’ but ‘Financially Dependent.’
You’re a millionaire but you still have to go to work!
At the same time Property is how 90% of financially independent people achieve their independence. Property is massive and as long as people need a place to live it’s going to be worth something.
The second big player is the stock market. The potential within the stock market is huge but there is also risk where you can suffer losses. The stock market is not for everyone but for those that are willing to put in a bit of time each day, the potential upside is massive, when it comes to generating cash flow and subsequent ‘Financial Independence.’
Getting Rich – Commercial v Residential Property
So far we haven’t achieved both. Stocks can technically generate cash flow sooner but there are also many other external forces in play which can hurt potential gains or even stop the cash flow from coming in.
In property however the typical strategy is to buy a house. With today’s prices this will quickly make you rich, but not generate cash flow. What it will do however is generate equity.
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Equity is the best ticking time bomb you’ll have access to in future. As the value of your property increases over time (years) so does your equity and equity is buying power! Equity is what can allow you to gain additional property and additional asset wealth.
But residential Property – particularly investments which create net cash flow from positive rent likely won’t get you to a point where you can fire your boss and retire early.
This is where mixing things up with commercial property comes in. Commercial property is where the cash flow comes in. However depending on whether you have the option to buy, factory or warehouse space, a shopfront, or office space – commercial property might give you cash flow but not necessarily give you equity, which can make it harder to multiply later. And this is a problem when you need to squirrel the positive cash flow away today to buy the next asset in future.
At this point you’re still not financially independent.
Long term you want to be diversified in both.
Getting Rich and Financial Independence is a process and you need to ‘buy in’
Reaching financial independence is a multi-step process. Whatever strategy you choose will need seed money to invest in the first place.
This could be a deposit for your owner occupied home or an investment in residential property which can grow in equity or simply to generate cash flow in commercial property.
You also can’t really make a strong entry into stocks without the education and the seed money to purchase shares in the first place to begin generating cash flow.
Without the Seed money to invest (buy in) with in the first place you’ll forever be stuck in a job where net income will either be marginally greater, equal or less than the cost of your lifestyle.
Related: Why Jobs are not safe anymore and neither are you
With job security declining, simply competing for the next role is not a strategy that can secure your lifestyle either today or in future. The only security is in taking control and being able to generate your own active cash flow to gain the seed money you need to create passive income.
There is a difference between being ‘Rich’ and ‘Financially Independent.’ In order to secure your future you need the active income to be able to buy into both!
Related: The Mindset shift to being your own boss