Why Most People Fail to Achieve Financial Freedom

Before discussing how individuals can achieve financial freedom, let’s look at three examples to understand why most people fail to achieve it. Three types of people who cannot achieve financial freedom:

The First Example

The first example summarizes the experiences of many people around me. Let's imagine a fictional protagonist who is a technical expert or a professional in a similar field, such as a skilled salesperson. This person hears stories about others making a fortune through companies' IPOs and getting rich from the stock market, so they join a promising startup, receiving a considerable amount of stock options. As the company raises more funds, its valuation increases and the protagonist's paper wealth grows; however, only 2 to 3% of startups make it to IPO or get acquired at a high price, and of those IPOs, less than 5% turn into high-growth star companies. Most of these companies, after several rounds of funding, either close down quietly or become stagnant, and the protagonist's paper wealth shrinks as the company stock becomes worthless. Sometimes even a better-quality startup may get acquired by a big company, but even as an early employee, the protagonist's gains are limited—usually to just one or two years' worth of salary. Considering the reduced salary and benefits when they first join, the protagonist's overall earnings are often on par with those of other workers in the same industry with similar experience. At this point, the protagonist faces two choices: either stay with the larger company or try their luck with another new startup, and many people in Silicon Valley would choose the latter, leading their wealth to rise and fall again.

The Second Example

The second example comes from a combination of interviews and reports I’ve seen online, along with examples from people I know. The protagonist comes from a modest background but was outstanding academically and worked hard to attend a top university in a big city. After years of effort, they made it to a senior position at a large company with a million-dollar annual salary, enjoying what seems like midlife success. Today, many high school students who are busy studying and young professionals striving in their careers likely see becoming such a person as their ultimate goal. Once in the company's executive ranks, this person's job requires frequent business trips, family vacations, occasional overseas travel, and stays in five-star hotels. They also deal with numerous social events, often toasting and networking, and feel a sense of accomplishment. Then one day, they are suddenly laid off, or the company shuts down. The protagonist realizes they have very little savings; their largest asset is their house, which they cannot sell as it would mean a future of uncertainty. The next significant asset is the stock options given by the company, but due to the company’s downturn, these are worthless. As for luxury jewelry and clothing, these cannot be liquidated either. When the mortgage is due, they realize that the house and car have become burdens, and if their children attend a private school, they may even struggle to pay the tuition. Even if they want to simplify their lives and stop spending on luxury items, they find it impossible, as many of those expenses were seen as investments in their future earnings—stopping such expenditures would mean never being able to earn that level of income again.

The Third Example

Finally, let’s look at the third example. This protagonist is a successful business owner. They are entrepreneurial, love learning, and are more diligent than others. They built their business over many years and now hold great influence within the company. The protagonist understands the ins and outs of the business but does not trust the people around them, so the company is run more by personal management than by structured systems. As the number of employees grows, the protagonist becomes busy with daily operations and lacks the time and energy to study broader market trends; as a result, it’s difficult to keep up with the industry’s evolving direction. Being a part of a larger industry chain, the protagonist’s company has a constant flow of orders and income, but the profits are minimal since the competition is fierce. After many years, the company still lacks brand influence and innovation. The business earns well on active days but sees little to no income on days off, and the operational costs remain. Since the business’s success is largely due to the protagonist’s personal capabilities, they are reluctant to entrust the business to their child or subordinates. The protagonist ends up like a person wearing red ballet shoes—constantly moving but never able to stop. Although money seems plentiful, it's not real freedom, as halting operations means everything disappears.

Problem Analysis

So, what went wrong for the protagonists in these three examples?

The problem with the first protagonist is easy to analyze. They misunderstood the difference between paper wealth and real wealth. Based on an incomplete survey of mine and other investors I know, private equity funds in the US that invested in China over the past decade have been lucky to recoup half of their investment; the return from venture capital in China has been even lower. Even though some investors make money, the percentage is very small. Given that most investors didn't earn profits, it's no surprise that those who rely on stock options from startups cannot turn their paper wealth into real wealth. What's worse, many of these startups attract employees with non-quantifiable promises, such as titles like Director or Vice President, or by dangling grand visions. When the company is doing well, it feels like a feast, but when things turn bad, it all collapses, and the protagonist realizes they've gained nothing.

The second protagonist's situation is more common. Their primary income consists of salary and bonuses. For most high-income earners, a $1 million salary after taxes and social expenses may leave them with only half of that. Many would wonder why I set this protagonist's background as modest, but this is because, for them, a $1 million salary seems like an amount they could never spend. However, maintaining their high-status lifestyle in a first-tier city—buying a good car, paying a mortgage, dressing well, and ensuring their family keeps up appearances—means there's little to no savings. It's like a company reinvesting its profits back into production.

The third protagonist shares a common issue with many others. From the outside, they seem successful, but their biggest problem is not understanding the difference between profit and free cash flow. As a business owner, they are constantly facing additional investment needs. Even if their financial statements show healthy profits, they spend a lot maintaining relationships with business and political contacts and managing their status. If those expenses stop, the business suffers immediately. So, how much profit can be converted into free cash flow? They may not even know. Ten years ago, I met some friends who were making hundreds of millions in profits annually—some even with net worths in the billions; however, today, when I talk to them, they can't even come up with a few million in working capital, and some have even been blacklisted. Their common mistake was thinking that continuously reinvesting in their businesses would always bring greater profits without focusing on free cash flow. A slight economic downturn turned their profits into losses and disrupted their cash flow. This is the same mistake the second protagonist made when enjoying higher earnings.

Experience Traps in Survival Laws

We've all heard the story of the farmer waiting for a rabbit. From God's perspective, the farmer's luck in finding the rabbit is random and should not be relied on for a stable income. If the farmer experiences this a second or third time, they might mistakenly think that this is sustainable cash flow. Bacon, the master of empiricism, warned us to be wary of being trapped by the ropes of our own thoughts. This means that people—especially those with decent incomes—often plan for their futures based on limited experiences, which may not hold in the long run. For salaried workers, salary is essentially free cash flow, and as they rise through the ranks, they earn more with society providing better opportunities. This is simply an assumption based on past limited experience and may not be reliable. In fact, when the companies that salaried workers depend on face difficulties, they too will be affected. In agricultural societies, it was common knowledge that after seven years of good harvest, there would be seven years of drought. This experience proved reliable, and in industrial societies, economic recessions typically occur every 8 to 10 years. Any successful business or individual must survive each crisis and take advantage of the opportunities left by others. One doesn't treat accidental good fortune as sustainable income. In history, even the most prosperous industries eventually see most companies disappear, leaving only a few to become industry leaders. People are no different. For example, in investment banking, half of the professionals are typically eliminated every 7 to 8 years due to major market crashes, but the survivors gain access to more resources. Surviving two cycles is often enough to achieve financial freedom, which I will talk about more tomorrow.

Summary

Most people misunderstand personal free cash flow in several ways: they confuse paper assets with real wealth, overlook the impact of additional investments on cash flow, and treat occasional luck as a predictable future outcome. Here's a final question for you: Have you ever mistaken past earnings or luck as a reliable long-term source of income for the future? Feel free to share your thoughts with me.