A great deal of time, effort, and emotional energy is devoted to the idea of increasing the value of investments. One common objective is to allow the client to have enough money to support himself or herself without having to go to work every day unless he or she wants to.
But how does this really work? We expect that clients will save money out of their working income over a period of years, amassing a reservoir of money, and draw from it during retirement. What exactly is that money supposed to pay for? The answer, of course, is the client’s month-to-month expenses. So investing itself comes full circle, back to cash flow.
If a client has reliable, adequate cash flow from external sources (for example, pensions, fixed annuities, or Social Security), she needs no reservoir of savings and investments. Another client, with the same cash flow needs but with no reliable external sources of cash flow, needs a substantial reservoir of savings and investments.
How do families become financially independent? Where do their fortunes come from? There are three lawful ways to acquire money.
Affiliation: Marry it, inherit it, receive it as a gift. Such so-called wealth is often fleeting because those who possess it haven’t learned to manage it.
Earn it: Employment (for yourself or someone else) is how most of us get our money. But if we don’t want to do it forever, making your work optional equals financial freedom.
Return on investment: Let your money make money. When you produce more than you consume and save the surplus, that surplus can go to work for you. Eventually, you could have enough so you no longer have to go to work for anyone.
(Bert Whitehead and Kenneth F. Robinson, Overcoming Financial Dysfunction Workbook, ©2005—2007 by Bert Whitehead, p. 3-2, emphasis in the original.)
If the client produces more money than he consumes, the difference is saved. Saving from regular income over time is the only way most clients will ever have the opportunity to accumulate a substantial reservoir of wealth.
Unfortunately, the most commonly recommended techniques for saving, the everyday mechanisms of spending, and intense social pressure to conform can make it difficult for clients to take and keep control of their cash flow.