What You'll Learn...
- Little evidence supports the popular idea of having 7 income streams
- Chasing extra streams leads to unnecessary risk by investing outside expertise
- Study shows most millionaires have just 3-4 income streams, not 7
- Growing your core business outperforms diversifying into unfamiliar areas
- Achieving freedom requires liquidity – illiquid investments limit cementing a risk-free lifestyle
- You don’t need moonshot bets with every dollar invested – it’s okay to be boring
The Promise of Freedom
If I think back to why I started my first company, and you made me narrow it down to one reason, I’d say that it was to create freedom.
I wanted the freedom to live life on my own terms– to travel when I wanted, to open doors to rooms that are closed to most, to control my schedule and spend time with the people I loved, to see places and experience things most would only dream of, to play the game of life at the highest levels.
I imagine if I asked most of you, the answer would fall somewhere in the freedom category. How do I know? Because over the years, I’ve asked this question to hundreds of founders, and almost all of them eventually distill their answer to some form of freedom.
Freedom like this generally requires money. So what do we do?
We start companies.
We take big risks, we bet on ourselves, and when things get tough and others would quit, we push through.
And at some point, if we are lucky enough and diligent enough, we start to see the fruits of our labor. We become profitable, and have more than enough money coming in to cover our expenses.
But this creates a whole new set of challenges around one big question:
What do we actually do with that money?
How do we use it to build the life that we set out to create in the first place?
If you are like most of us, you look to those who have come before. We start doing the things that we think other wealthy people are doing in hopes that we will have similar outcomes. And that can be a trap.
The Seven Streams Myth
If you look at the generic advice around the internet, they say the average millionaire has seven streams of income.
So we go about looking for ways to create more income streams. First, we have our primary business, which is working well enough. But we are told that we need more, we need to diversify.
- Maybe we decide to build a real estate portfolio.
- Maybe we decide to become an angel investor.
- Maybe we decide to try our hand at day trading crypto.
Or, if you are anything like me, maybe you go for all of the above and a few more for good measure.
Our hope and our prayer is that if we spread our money between multiple ventures and take enough risk, we’ll create the seven streams of income that will carry us into the proverbial sunset of financial freedom.
The problem is that the idea of seven streams, while appealing and perhaps even seemingly logical, is a myth.
No one really knows where this idea came from. There is no study, research, or place to attribute this golden axiom we accept for the truth.
The idea in general was popularized by Robert Allen’s book Multiple Streams of Income. Another possible source is Tom Corley, who did a five-year study on wealthy individuals and wrote a book called Rich Habits.
However, rather than seven, here is what Tom found when it comes to the streams of income millionaires actually have:
- 65% had three streams of income
- 45% had four streams of income
- 29% had five or more streams of income
The average isn’t even close to being seven.
The further away we get from our primary expertise, the more likely we are to lose money.
The Problem With Diversification
So why does this matter? Who cares how many income streams rich people have? More streams equals less risk, end of story?
I would argue that this myth has created untold damage when it comes to entrepreneurs’ path to building financial freedom.
Here’s the problem: Trying to create multiple income streams leads us to invest in ventures outside our expertise. The further away we get from our primary expertise, the more likely we are to lose money.
In chasing outsized returns, we invest in high-risk, high-reward ventures. We take the money we’ve made by taking risks and betting on ourselves and then go out and risk it again by betting on new and exotic deals, without the secret sauce of our own expertise.
It’s dangerously close to gambling.
Boring old index funds? Not for me, no sir.
I’m an entrepreneur, ahead of the curve; I have access to information; I have inside knowledge! I can beat the market; and because I know I can, it would be irresponsible for me not to take advantage of my position!
Sound familiar?
Another problem is that many of the alternative investments we can access as entrepreneurs are illiquid. Sure, we might be able to invest in the next unicorn, but it’ll take 5-10 years before we can even consider accessing that money.
The idea that illiquid assets outperform liquid investments is most likely the result of cherry-picked data and self-reporting by fund managers.
The most efficient way to reach financial freedom is to use your capital, time and resources to reinvest and grow your primary business. Put your creative energy there.
Finding Financial Freedom
Instead of investing our hard-earned money in whatever deal comes across our desk in hopes of diversification, my journey as a professional investor for over a decade has led me to an opposite conclusion.
The fact is, if you have a primary business that has the capacity to continue to grow, you already have the best vehicle available to generate outsized returns.
The most efficient way to reach financial freedom is to use your capital, time and resources to reinvest and grow your primary business. Put your creative energy there.
My definition of true financial freedom is when my assets generate enough cash flow to cover my spending for the rest of my life.
The problem is that achieving this requires a certain amount of liquidity. I call this number “escape velocity”.
Every time we lose money on a failed investment, we sabotage our path to freedom. We lower our velocity.
There was a moment in time, right after I sold my company, that I would love to take back.
As a mentor of mine says, “Don’t risk it twice.”
That’s why I’ve spent the past few years, post-exit, rebuilding my career to reflect the playbook I wish I had when I was going through all of this the first time.
I’m not one to ruminate on the decisions or mistakes of the past. I try to take the lessons I learned, integrate them, and move forward.
But there was a moment in time, right after I sold my company, that I would love to take back. I could have invested that lump sum smartly (with a wealth manager’s help) into a fixed-income portfolio that would have covered my spending for the rest of my life with little to no risk.
Then, once lifetime spending was covered, with the very next dollar above my reserve, I could swing for the fences and take as much risk as I liked.
Instead, I put it all back in the middle. I made some great investments, some terrible ones, and some that we won’t know the outcome of for quite some time.
But once I started deploying my capital, I no longer had the opportunity to cement a risk-free lifestyle.
Now I’ve finally built the playbook I wish that someone had given me. I didn’t know the first thing about fixed income, and I certainly didn’t understand how professional investors think about risk management.
Looking Forward
Today, I’m committed to rebalancing.
I have plenty of illiquid investments, and as they pay out, piece by piece, I rebuild my portfolio for safety and longevity. I’ve said no to some investments that I genuinely believe are once in a lifetime. But the fact is, the only investment I need is the one that I already had, the one I only have to make once in my lifetime– and the one that keeps paying me forever.
Whether you’re just starting to hit the growth curve and bank some cash, or inking a deal to exit, I’d urge you to consider that what got you here won’t get you where you need to go. Not every investment needs to be a moonshot. If you need help finding your own path to financial freedom, you’re welcome to download my One-Page Wealth Snapshot.
It’s okay to be boring sometimes.
Perhaps take it from a guy who’s had a wild ride – and would love nothing more than to allow you to learn from me so you don’t have to learn the hard way.
Related Articles
Breaking Free: A Founder’s Guide to Overcoming Mental Blocks
