Why Most People Can't Achieve Financial Freedom

Yesterday, we discussed how businesses generate free cash flow, which primarily depends on two factors: high profit margins in their core business and the ability to generate profits without continuous reinvestment. To achieve this, a company needs to do two things well: choose the right industry and build a strong competitive advantage. The same logic applies to individuals. Before we dive into how people can achieve financial freedom, let's examine three real-life examples that highlight why most people struggle to attain it—three types of people who can't achieve financial freedom.

Case 1: The Startup Dreamer

This first case is a common scenario among many professionals. Let's imagine a character—a technical expert or a skilled salesperson—who sees people around him making a fortune when their companies go public. So, he joins a promising startup and receives a generous amount of stock options. As the company raises multiple rounds of funding, its valuation soars and his paper wealth increases. However, statistics show that only 2–3% of venture-backed startups go public or get acquired at a high price, and less than 5% of those public companies experience significant stock price growth. More often than not, the startup quietly shuts down after a few funding rounds or lingers in a stagnant state, and as a result, his stock options become worthless. Even in cases where a startup gets acquired by a larger company, early employees typically receive limited financial returns—perhaps the equivalent of one or two years’ salary, considering that he likely accepted a pay cut to join the startup. His total earnings may only match what he would have made in a stable corporate job. At this point, he faces two choices: stay with the acquiring company and settle into a corporate career (which leads to our second case) or jump into another startup and try his luck again. In places like Silicon Valley, many opt for the latter, repeating the cycle of rising and falling wealth.

Case 2: The High-Earning Corporate Executive

The second case is based on numerous interviews, reports, and personal observations. The protagonist comes from a modest background but excels academically, earning a degree from a top university before landing a job in a major city. After a decade of hard work, he rises to a senior executive position in a large corporation, earning a $1,000,000 salary. He has finally made it—this is the ultimate dream for many ambitious students and young professionals: climbing the corporate ladder to financial success. However, with his new status comes frequent business travel, luxury vacations, and five-star hotels to maintain his professional image. He entertains clients regularly, indulging in lavish dining and networking events. Then one day, he gets laid off or the company shuts down. When he checks his savings, he's shocked to find very little. His largest asset is real estate, which is difficult to sell, and he doesn't want to sell it because that would jeopardize his future lifestyle. His second-largest asset is company stock options, which have lost all value due to the company's downturn. Luxury goods, such as designer clothing and jewelry, are practically worthless in resale. When his mortgage payment comes due, he realizes that his house and car are liabilities, not assets. If his children attend private school, he may struggle to pay tuition. Even if he wants to cut back on spending, it's nearly impossible because many of his expenses were investments in maintaining his income level; if he stops, he risks losing future earning opportunities.

Case 3: The Business Owner Trapped in His Own Success

The third case features a successful business owner who is intelligent, hardworking, and deeply committed to his company, which he built from the ground up. He knows every aspect of his business but struggles to trust his employees, leading to a management style that relies more on personal oversight than structured processes. As his company grows, he gets busier with daily operations and doesn't have the time to study macroeconomic trends. His business is part of a competitive industry—there's always demand—but he can only charge low prices because any price increase would drive customers to competitors. Over time, his company fails to develop brand influence or meaningful innovation. Although he appears to earn substantial daily profits, his company has high operating costs. If he stops working, the income stops while the expenses continue. Since his business success is tied to his personal efforts, he can't easily pass it down to his children or employees. He's like a dancer trapped in red shoes—constantly moving but unable to stop. Although he seems financially stable, he has little true free cash flow. Many business owners fall into this trap, spending heavily on maintaining industry connections and status, and assuming that reinvesting money into their business will always yield higher profits. However, when economic conditions shift, profits can turn into losses and cash flow dries up overnight.

Why Do These People Struggle?

These three cases reflect common misconceptions about financial freedom:

• Confusing paper wealth with real wealth. Money professionals mistake stock options and paper gains for true financial security, but without liquidity, these assets can become worthless.
• Failing to account for the impact of reinvestment on cash flow. High-income earners and business owners often spend heavily to sustain their income, not recognizing how reinvestment eats into their free cash flow.
• Mistaking luck for a reliable income source. People often overestimate the stability of their income, assuming past earnings will continue indefinitely.

The Experience Trap and Survival Strategies

We've all heard the story of the farmer who found a rabbit trapped in a tree stump and assumed he could rely on it as a steady food source. From an outside perspective, it was pure luck, but if he catches another rabbit the next day and again the day after, he might start believing it's guaranteed. As philosopher Francis Bacon warned, "Beware the bondage of your own thoughts." Many people, especially high earners, base their future plans on past experiences that may not hold true for salaried employees. Wages might seem like reliable cash flow, with promotions promising even higher income, but this assumption is based on limited experience. It doesn't account for company failures or economic downturns. In agricultural societies, people knew to expect seven good years followed by seven bad years; in modern economies, recessions occur roughly every eight to ten years. The key to long-term financial success is surviving each downturn and taking advantage of the opportunities that follow. History shows that every so-called golden era of an industry ends with only a few survivors—those who adapt and persist. The same applies to individuals. For example, investment banking professionals face a major financial crisis roughly every 7–8 years. About half of them get wiped out, but those who survive two cycles usually achieve financial freedom.

Key Takeaways

Most people misunderstand personal free cash flow. Common pitfalls include:

• Treating paper wealth as real wealth.
• Failing to account for the impact of reinvestment on cash flow.
• Assuming past luck or income stability will continue indefinitely.

Now, here's a question for you: Have you ever mistaken past income for good fortune as a reliable long-term source of financial security? Share your thoughts in the comments.