Of These 4 Financial Paths, You Can Only Choose One. Does Yours Lead to Financial Freedom?

by | BiggerPockets.com

If I could sum up why I invest in real estate in one word, it would be this:


I believe that investing in real estate will allow me to accumulate net worth at a more rapid and predictable rate than any other type of investing over the next decade. I also believe that this net worth will allow me to pursue my passions at the pace at which I desire.

While many folks will point out that wealth does not equate to happiness, I hear very few people arguing with the logic that increased cash flow — especially passive cash flow — in one’s life increases options.

In this article, I want to delve into the “categories” that describe the financial situations of most people. I then want to explore the available options, or freedom, that those types of people have in designing their lives over the long term. As I think that it’s important to help others achieve their goals, I’ve also included a tidbit in each category that describes one or two effective ways to help these people improve their financial positions and free up their time to pursue their passions.

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Category 1: Cash Flow Negative

Level of Freedom: Lowest

Long term, the consequence of a cash flow negative life is perhaps the most severe imaginable; in most cases the cash flow negative individual will lose almost all control over how they spend their time.

A cash flow negative life is one in which an individual or family spends more than they earn, and this pattern is repeated consistently over the long term. The vast majority of folks who are cash flow negative have a net worth very close to zero. In some cases, cash flow negative lives can accumulate substantially negative net worth, but creditors learn quickly, and future access to financing becomes nearly impossible.

Related: Is Financial Failure Due to Lack of Motivation? Why Money Issues Run Rampant

Cash flow negative lives have a bleak outlook. At the extreme, these folks may be homeless, may have problems with substance abuse, and may suffer from other disadvantages that render them incapable of remaining employed over any significant stretch of time. Sadly, these individuals are often in abusive situations because a significant other or caretaker has total financial power over the relationship.

In more mild cash flow negative situations, there is the simple misery of constant and unending financial pressure. Debtors, upcoming expenses like rent, groceries, and insurance, and a total lack of discretionary income result in a very tough and vicious cycle.

It can be very hard for folks in this predicament to improve their lot in life. While cutting back on spending is a must, a severely cash flow negative life will ultimately result in a total lack of assets. Folks with this condition can expect a long, hard-fought battle to get back into steady, full-time employment, and can expect to pay cash upfront for all expenses in the short to medium term future. The good news is that folks can see a dramatic improvement in their lives with just a few months of concentrated effort.

Personally, I try to work with these people as a volunteer, and I’d encourage you to do the same. Increasing one’s financial wherewithal and giving them more power over their own lives is the best gift I can think to give.

Category 2: Cash Flow Neutral

Level of Freedom: Modest

Long term, a cash flow neutral life is one that is reliant on either a paycheck or in the case of the self-employed, one or two large clients. Large life decisions are heavily dependent on a boss or are based on a career in a very narrow field.

It seems that most people today are in this position and will be for the duration of their lives. A cash flow neutral life may be one that is increasing in net worth, but that accumulation is usually an accident — the result of some “default” settings accepted as normal in American life. Mortgage payments and the resulting increase in home equity, automated 401(k) contributions, and perhaps a handful of depreciating assets like a couple of vehicles are the only contributors to net worth. All, or materially all, other dollars that enter the individual’s life are spent accumulating luxuries of no lasting value.

While the definition of cash flow neutral is open to interpretation, I choose to lump into the “cash flow neutral” category all lives that routinely save less than 10% of their total take home pay. Imperceptible positive cash flow and its tiny impact on financial decision making power is not a material improvement over no savings in terms of decision making power, at least not in the next few decades.

The cash flow neutral individual will typically work long hours over a career lasting the better part of a lifetime, perhaps on the order of 40 years or so. Cash flow neutral folks are often uneasy about their family’s financial security and are thus uncomfortable thinking about or talking about money. They are also uncomfortable with risks because anything that could potentially result in the loss of a job, major client, or career could result in a loss of cash flow, rendering them immediately cash flow negative. They content themselves with tolerable weekends and evenings that they spend at their discretion, leading to eventual acceptance of their stagnant financial position.

Most often, folks with cash flow neutral lives believe that they are doing the right things with their money. They see themselves as on track with their superiors at work or neighbors down the block. It can be hard to help these types of people out financially.

Personally, I find that getting a cash flow neutral person to repeat the following phrase tends to be an effective means of lighting a fire under their belly:

“The best possible outcome in my life, should I continue with my current career and savings rate, is that I end up in that guy’s office over there, doing that job, and doing it all day long every day of the week.”

If the cash flow neutral person is happy or enthusiastic about that phrase, then no further action is necessary. Often, however, after just one repetition, it becomes relatively easy to encourage that person to begin taking the simple steps towards living in a more fiscally responsible manner.

Category 3: Cash Flow Positive

Level of Freedom: High

These are the folks who live well below their means and accumulate assets at a high rate relative to their earned income. These folks are able to work jobs of their choosing, are able to make large life decisions with thought given to their overall well-being first, and have sufficient leeway in their lives to take risks with their careers and passions, should opportunity come a-knocking.

The difference between a cash flow neutral person and a cash flow positive life can be hard to spot. The cash flow positive individual might work the same job, wear the same clothes, and do the same things for fun, but there will be subtle differences. You might not see cash flow positive folks with fancy new cars, you might not see them eating out for lunch every day, and you might see them living in an apartment that’s not quite as lavish as their peers. Over time, however, these folks will be starting businesses, acquiring property, making connections, or will otherwise be presented with options that cash flow neutral folks are never exposed to.

Over time, cash flow positive lives result in ever-decreasing dependence on others and lower tolerance for boring/ineffective work. They desire and seek out rewarding and engaging challenges in life.

Assisting these folks is fun and engaging — they actively want to improve their own lives and often seek the counsel of others. The best way to assist them in improving their financial positions is to point them towards education, resources, and opportunities that will allow them to best deploy their hard earned savings for a good investment return. This will help them expand on the virtuous cycle that is earn, save, and invest, and continue to increase their life’s freedoms.

Category 4: Financially Independent

Level of Freedom: Highest

Financial independence is a pretty common goal on BiggerPockets. It is achieved when cash flow that requires no work (or minimal active work) safely and consistently surpasses total lifestyle expenses.

It seems like a lot of folks fantasize that financially independent individuals lead a life of leisure. They’ll envision a nice beach, frequent traveling, massages, and other luxuries. While I’m sure that some folks do treat themselves to these types of lavish lifestyles, as a practical matter, the financially independent folks that I know are some of the hardest workers around.

The reason that these people work so hard is because they no longer need to work for money. They work to solve a problem they are passionate about, master a hobby that they enjoy, or to build an empire that will last for years. Because they have total control over how they spend their time, they only participate in projects that are truly interesting and engaging to them. In fact, because of their level of dedication, it can sometimes be hard to spot financially independent folks in the crowd.

Related: A Slow, Boring, Incredibly Awesome Strategy for Building Wealth Through Passive Real Estate Investing

The best way to engage with and help these individuals out is to assist them in focusing on their passions. They are often business owners, chairmen or chairwomen of large nonprofit organizations, or simply have a hobby that they pursue relentlessly. Seek to find a problem related to their area of interest that you can solve for them. They can be very powerful and well-connected folks, and finding the answers to their specific problems can be highly rewarding to you over the long term.


I think that it is sad that most people seem to be stuck in the cash flow neutral mindset, and that this is the hardest one to break with. It’s my belief that this is the type of person who can commonly be found on BiggerPockets, lurking, reading and educating themselves, but always just one step away from action. They are so close, but not quite ready to rock the boat and take control of their money and thus their daily life.

I’d hope that by showing you the freedom that comes with creating positive cash flow in your life, you’ll be inspired to take the next step towards creating that freedom in your own life — whether it’s through real estate, a side business, or some other investment.

I’d encourage you to repeat this phrase to yourself and see if you are ready to take action:

“The best possible outcome in my life, should my financial position remain unchanged, is that I end up in that guy’s office over there, doing that job, and doing it all day long every day of the week.”

  • Is your financial mindset holding you back from pursuing your passions?
  • What steps are you taking to further your journey towards financial independence?
  • What will you do with that freedom once you achieve it?

Leave your thoughts below, and let’s have a conversation!

About Author

Scott Trench

Scott Trench is a perpetual student of personal finance, real estate investing, sales, business, and personal development. He is CEO of BiggerPockets.com, a real estate investor, and author of the best-selling book Set for Life. He hopes to now share the knowledge he has acquired with others so that they will have the tools they need to repeat his results in just 3-5 years, giving them the option to go anywhere they want in the world, work any job, start any business, or finish out the journey to financial independence and retire young. Scott lives in Denver, Colorado and enjoys skiing, rugby, craft beers, and terrible punny jokes. Find out more about Scott’s story at JoeFairless.com, MadFientist, and ChooseFI.


  1. Jesse T.

    Good article.

    I think that being cash flow neutral can make people very risk averse. Since it can be so hard to accumulate assets they are very scared to lose them.

    Paradoxically being cash flow positive which often comes from being financially conservative, can make one more comfortable with investment risk. This is because capital lost in an investment that fails can eventually be replaced from the financial surplus.

    • Scott Trench

      Thanks Jesse! I agree completely with your paradox comment. I feel the exact same way. It’s almost as if because I’m cash flow positive the worst thing for me as far as accumulated capital goes is for it to sit still and not have a chance at increasing in value. I HAVE to invest it somewhere, and with the best possible returns.

  2. You just described pretty much the 4 classes in usa. Poor , lower class, middle class, and upper class. A person with high income can live most of their life living like a middle class since they always work for their money. While like you say a middle class earning passive income higher than his or her salary would mean he is financial free.

    • Scott Trench

      Andy – I completely agree with your comment here. It’s absolutely true that high income folks will never improve their overall level of freedom if they cannot control their spending and accumulate significant passive income.

  3. Jeff S.

    Glad you mentioned that FI people are many times very busy and not living the life of Riley. Am personally always amazed when I see multimillionaires that work their tails off. Nice thing about RE there is no age discrimination and if cash flow positive it just keeps getting better.

  4. Chris Newman

    Another great article in your series on the entrepreneurial foundation of real estate investment, Scott!

    Achieving financial freedom is what gives us the personal time freedom to become who we really are. That’s the real reward. Thomas Paine expressed this idea well in 1776 in his Entrepreneur’s Creed. So, this is not a new divide within our species – it could have been written yesterday. I’ve tweaked it just a bit:

    The Entrepreneur’s Creed

    by Thomas Paine
    from Common Sense, 1776

    I do not choose to be a common (wo)man.

    It is my right to be uncommon – If I can.

    I seek opportunity – not security.

    I do not wish to be a kept citizen, humble and dulled by having the state look after me.

    I want to take a calculated risk; to dream and to build, to fail and succeed.

    I refuse to barter incentive for a dole; I prefer the challenges of life to the guaranteed existence; the thrill of fulfillment to the stale calm of utopia.

    I will not trade freedom for beneficence nor my dignity for a handout. I will never cower before any master nor bend to any threat.

    It is my heritage to stand erect, proud and unafraid; to think and act for myself, to enjoy the benefit of my creations and to face the world boldly and say: “This, with Bigger Pockets’ help, I have done”.

    All this is what it means to be an entrepreneur.

    • Scott Trench

      Nice Chris! I love it.

      I think that its a hell of a lot easier to be bold if you have low personal spending and have a large number of ways to return to a positive cash flow life should your risks not work out. That’s why I believe so much in building the foundation correctly.

      Really appreciate the support!

  5. Walker Hinshaw

    Scott, solid article. It really is remarkable how small changes in spending habits can set you on a path from cashflow neutral to cashflow positive very quickly. And like you said (maybe in the comments), once you have money building up that you can afford to risk, suddenly you are no longer too afraid to take action. Once you take action, you learn and get better at taking action, then take it again. It’s a domino effect that all starts with saving.

  6. Thomasine Scott

    I need help. I’m definitely a member of category 1/2 and it’s so difficult to get out of that mindset. I feel stuck. I started looking on bigger pockets to learn about wholesaling but just last week I learned that it may be illegal and several states including mines (TX) are starting to crack down on the practice. After listening to a recent podcast it was suggested that the best option is to get your real estate license. I was attracted to wholesaling because it allows people with little to no money to accumulate a small stash that could lead to more options. I’ve been reading the biggerpockets posts, listening to podcasts and webinars, and trying to stick with this but that was a big blow for me. I know I just have to move past it and figure out a different way but flips as well as buy and holds are not really attractive to me right now. I wanted something that i could get in and out of fairly quickly. i don’t know enough about flips and I’m not confident enough in my knowledge at this point to venture into buy & holds (not to mention securing the cash which is something I’d never be able to do without some type of investor. No way a bank is going to lend it to me.) I apologize for the tone of this post. Just feeling frustrated today. I’ll pick myself and keep it moving. I know a big part of success is attitude. I think my next step is just going to be to look for a mentor in my area. Maybe being around someone that’s had some level of success can help me.

  7. Joe Harper

    Find another wholesaler in your market and become their best friend, be like their shadow, be an apprentice. Buy them lunch. Offer to drive them around. Go to the next county over if you have to. The knowledge is out there for free for those that simply seek it.

    In a nutshell, do not listen to anybody or any article that is not specific to your situation. You have a dream and you are the only person that can fulfill that longing inside you.

    Other people’s opinion of your activity is superfluous to your goal.

    Stop looking for excuses to give up and start looking for the way around the obstacles. Remember why you started on this path, write it down on your bathroom mirror in dry-erase marker.

    “There is a different way to live.”

    Start learning about what the wealthy people did to become wealthy, treat them like case studies.

    “Nothing in the world can take the place of Persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent. The slogan ‘Press On’ has solved and always will solve the problems of the human race.Calvin Coolidge 30th president of US (1872 – 1933)

    • Scott Trench

      Joe, I’m assuming you were replying to Thomasine’s comment. I agree with all your remarks, and I personally believe that dedicating some time to personal finance first, then looking harder at real estate might be a good idea.

      • Joe Harper

        d’oh. Yes I was trying to help him feel better. I agree with you, this journey does begin with a hard assessment of home finances, and then determine if full time employment is a better option for present circumstances.

  8. Mark Bommarito on

    This is a great Article that i can definitely relate to. I am in Category 2 and trying to figure out how to get passed it. I grew up watching my parents being in Category 2 & 1 and now as they are entering into retirement age, it scares me to think i could be in their same position, that is what motivates me to continue learning and figuring out a way to get started. I am in Southern California and my goal is to fix and flip properties, i am going to get their one way or another!!

    Go Bigger Pockets!!

  9. Kevin Andrews on

    Love the article Scott. I am one of those you mentioned who does the lurking and learning, but I have yet to take much action. I’m working up to it. So far been looking at Zillow and have done a couple of driving for dollars, but I have some sort of fear that is keeping me from following up on what I’m finding. I love all the encouragement that is given on Biggerpockets. I’ve been listening to the podcasts everyday on my way to and from work (I have about 1 hour drive to my JOB). Thanks again for the article

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