What is Financial Independence? (Part 1)

In attempting to achieve financial independence it is important to have a clear sense of what it is. As mentioned in our previous post entitled “What is Financial Freedom”, these terms are often used interchangeably. However, they are not identical. In this post we have a couple of definitions that help clarify what constitutes financial independence.

The first article is by “Trent” who writes for the Simple Dollar website. It details how he defines financial freedom.

The second feature will be presented in our next post.

(NOTE: Please note that the views in the attached posts/articles are strictly those of the authors and not necessarily those of Financial Freedom News, its management, staff or affiliates. Further, we advise readers to exercise due diligence in considering the purchase of any products or services offered by the authors or their websites.publications). FFN Editors

What Does “Financial Independence” Really Mean?
By Trent
for Simple Dollar October 9, 2010

“Financial independence” is a phrase often bandied about by people without any sort of consistent meaning.

Does “financial independence” mean complete freedom from debt?

Does it mean the ability to switch jobs without creating a financial panic in your household?

Does it mean having enough money to survive without further income?

Does it mean having enough money to thrive and chase whatever endeavors you like without further income?

Here’s the thing: they’re all definitions of financial independence.

Why so many different definitions for the same phrase? It’s simple: different financial writers use the phrase differently. They all tend to agree that “financial independence” is a worthwhile, lofty place to aim your financial efforts towards – they just can’t quite agree on what exactly that phrase means.

I subscribe to the idea that financial independence means that you have enough money to survive without further income. That does not preclude you from working for additional income. It merely means that if you were to quit working today, you would not lose any significant part of your way of life due to a lack of a working income.

I view many retirees as having reached this level of financial independence, for example. Retirees often do not have to work to maintain a basic lifestyle, but often choose to work out of a desire to do something interesting and productive with their time, and also a desire to live a lifestyle beyond their idea of a basic lifestyle – travel, services, a nice home, and so forth.

Others might have different viewpoints. Financial independence might occur for them once they’re outside of the burden of excessive debt. Others might feel independence when they can freely switch jobs, or when they have the ability to start their own business out-of-pocket.

The important question isn’t what financial independence means to me or what it means to some financial writer out there. What matters is what financial independence means to you. What does it mean to you?

On one level, this discussion really is about goal-setting. Many people look at financial independence as a state beyond what they currently have – and it’s something that has attributes that they want. Do you want the ability to easily switch jobs without panic? Do you want the ability to survive without having to work? Those are goals that all fall under the umbrella of financial independence.

The key part is to turn that idea of financial independence that you have in your head and in your heart into a long term goal, one that you’re planning on reaching in the future. What can you do today to move towards that definition of financial independence?

What’s the importance of writing about this? Whenever you read an article by a financial writer and the writer mentions “financial independence,” consider for a moment what that writer is actually talking about. Does it match what you define as financial independence? Or are they talking about something else?

This way, you’ll quickly know whether the information presented is directly relevant to you or whether you have to look for information within the article that is still useful to you even if you aren’t in line with the goals discussed in the article.

October 9, 2010 @ 2:00 pm – Written by Trent

Categories: Getting Started

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One comment

  1. Alex

    Interesting perspectives. I think Financial Independence is a combination of being debt free and having the required skills & experience to always be able to go to the market place and earn an income.

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