Net Worth VS Financial Freedom
Here are my thoughts on how to reconcile the two concepts.
0:00 – Welcome to the Show
1:02 – Why Net Worth and Financial Freedom are Different
3:52 – Is Net Worth a Vanity Metric?Read More
6:32 – A Tale of Two Brothers
9:20 – Wrapping Up
If you had to choose between having an asset portfolio worth:
- $500,000 with a 10% annuity generating $50,000 in cash flow or
- $1m with a 5% annuity also generating you $50,000 in cash flow.
Which would you choose?
I dare say the majority of people would pick #1.
And there lies the issue of net wealth.
Yet Australians seem to place such a significant emphasis on achieving a high net worth. Unfortunately, financial freedom goals are often overlooked because people believe that this is the metric that measures how successful someone is.Read More
Australians are Sold the Wrong Story
In Australia, we’re almost always sold the story that if you want to retire or be financially free, you need to ratchet up your net wealth.
Buy more property. Apply for more loans. Grow your portfolio.
Unfortunately, this advice is all very contradictory.
Growing net wealth for the sake of achieving a high net wealth becomes a vicious cycle of debt and low-performing assets that don’t necessarily perform for you.
Instead, I believe that financial freedom should always be the focus and the end goal.
Financial freedom isn’t about the pursuit of more, but instead, it’s about the journey of making sure that the wealth you build will work for you and help you achieve the outcome you want.
If you’re not focused on achieving financial freedom, don’t know what your objectives are and what your potential living expenses are when you stop working, you can find yourself taking on investments that can take you further and further off track.
Often, these assets can significantly slow you down or don’t serve you at all.
So what should you do?
You should balance your focus on pursuing net wealth against the goals you have and the timeline you want to achieve it in.
Is Net Wealth a Vanity Metric?
Net wealth for the sake of net wealth is like having a shiny trophy that sits on the shelf at home – it looks great, and you can look at it with pride.
But it doesn’t do much for you.
There’s a cohort of people out there who just like to appear wealthy. They enjoy the finer things in life like fancy cars and nice homes.
But when you peel back the curtain, you often find that their glamorous lifestyle doesn’t always seem to reflect what they show on camera or social media.
Some of these people are prepared to have those things in life to have that experience.
There’s another cohort that like the idea of saying “I have a net worth of $Xm”, as the metric itself matters more than achieving financial freedom.
Unfortunately, what some of these individuals fail to realise is that if you expect to create financial freedom without trying to build assets, you’re hurtling down the wrong path.
The same can also be said for those who are attempting to achieve a high net worth above all else – I believe this is also the wrong path.
A story – two brothers who were both brought up in the same household with the same upbringing and philosophical exposure end up going down two very different pathways when it came to wealth and legacy.
The first brother goes on to become a successful business owner with a vast conglomeration of companies. Being the businessman he was, he was barely at home let alone having the time to teach and spend time with his children.
Upon his death, he bequeaths a $30m fortune for his children.
The other brother becomes a teacher and is much more conservative due to his lower-earning capabilities.
Nonetheless, he does a great job of stewardship and builds a small base of assets that develop high cash flow – passing on an annuity of $30,000 to each of his children.
At the end 10-year mark, the children of the first brother had blown through the lot.
The children of the second brother go on to develop a significant wealth portfolio of their own thanks to the stewardship and teachings that their father had passed onto them.
The lesson: stewardship and teaching financial literacy are most valuable when it comes to intergenerational wealth.
How will your kids benefit from your investment legacy, and what’s the best way to do it?
Inter-generational wealth transfer is a very real thing for the majority of Australians with $3.5 trillion worth of wealth expected to be transferred in the next 20 years – the most significant intergenerational wealth transfer in the history of our nation.
What’s scary is that so many are ill-prepared to transfer this wealth with 76% with no will currently in place, and more than half of parents in Australia haven’t discussed their will or legacy with their children.
There are a whole host of factors and many ways to skin the cat when it comes to creating wealth and financial freedom.
But what’s most important is that you need to ask yourself – what is your objective?
Do you want an inflated balance with a high net wealth?
Or do you want an early retirement to go on that trip you always dreamt of?
While financial freedom may be the less sexy option when compared to high net wealth, it inevitably is best in serving you the outcome you want.
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