In my post “Are we Doing Personal Finance Wrong“, I talked a little bit about “Financial Freedom”. Of all the comments that the post got, that was the one thing that was mentioned most of all. Which, to me, means it bears some further discussion.
Financial freedom, or financial independence, can be defined a little bit differently depending on the person doing the defining. Like most personal finance, it’s highly dependent on the values of the person. What I define financial independence as might be a whole lot different from what you define it as. I think, no matter who is defining it, the real keystone is the word freedom or independence. We all want freedom and independence. Some autonomy from the rat race. The idea of having the financial ability to declare our independence is alluring.
What is Financial Independence, for me.
My definition of financial independence is likely pretty similar to most. In it’s most broad sense, I define it as the ability to not be swayed by financial needs. Breaking it down a bit more, it means not “needing” a job just to make ends meet. It means not “needing” a job to keep a roof over my head. It also means having the ability to take advantage of opportunities to improve my situation. Whether that means having the cash on hand to be able to buy or start a business, buy a rental property, or just take a month off to travel or learn something new isn’t all that relevant. It’s that I have that ability.
Something that needs to be said here is that at one point, not that very long ago, I thought of it as being synonymous with “independently wealthy”. Which may or may not be true depending on your definition of independently wealthy. For sure, I don’t believe that it matches up with the definition I had back then. Back then, I would have told you that independently wealthy meant retirement and not doing a dang thing. Sitting on the beach all day, every day, being utterly non-productive. That definition has changed. A lot. Financial independence, if it’s synonymous with independently wealthy, doesn’t mean that you don’t work, but that you have the financial freedom to do the work you want to do. Because you are free from the “need” part of the financial equation, you have the ability to do the work that you feel called to do without regard for how much it pays, whether it’s part-time or full-time, or whether it’s a short term project or not.
What is Financial Independence, for you.
As I mentioned above, your definition might differ slightly (or a lot) from mine. Maybe, for you, it really does mean sitting on a beach somewhere, doing nothing. Maybe it means not having to work and spending all your time volunteering instead.
However our definitions might differ is somewhat irrelevant. Our personal definitions still mean that it’s something worth pursuing to each of us. And, if our end-game is to be financially independent, I still don’t think we’re doing personal finance right. I still don’t think we’re even close. I think we need to break away from the systems we have, find the ones that work for our personal finances, and then achieve our financial independence.
Achieving your Financial Independence.
Breaking away from the systems we have for personal finance won’t be easy. Heck, our definition of financial independence will probably change along the way and require a new system again. But, achieving that financial independence should be our primary goal. Not retirement. Not our childrens’ college education. And certainly not saving up cash to pay for that big SUV. Our primary goal in our personal finance should be achieving financial independence. Once we’ve achieved that, retirement, education, and big trucks will come. And they’ll come without sacrificing anything.
The Path to Financial Independence.
Much like our definitions differ, so too will our path to financial independence differ. Undeniably, I think that the first landmark on that path has to be the complete and utter destruction of all debt. Before we worry about anything else, we have to be free of the yoke of debt. Joan Otto, the community manager at Man Vs. Debt, wrote about this recently specifically referencing retirement accounts. Take a minute or two and read it. Then, pay special attention to the comments. Aside from a few people, almost all of the comments are people who think she’s off her rocker.
Is she off her rocker? Or is she just developing a new system for her personal finance that leads towards her financial independence? It takes a certain amount of courage to admit to the thoughts and ideas that she does in that post. (I should know, see: Why I’m Withdrawing from an IRA) But, then try and remove what you’ve been taught about retirement and saving from your mind for a minute and re-read section 4 of her post. She’s not being irrational. In fact, I’d argue that she’s being overly rational. I think I’ll have to write more about that in another post, but the Vulcan, logic loving, part of me thinks she is right.
Our paths to financial independence will vary. Some of those people in the comments of Joan’s article will achieve it using the current system. Many of them will have started saving early, and found ways to drastically save. But, will they have the liquidity available to make a move on an opportunity in the 30’s, 40’s, or even 50’s? Or will it have to wait until they’re past “retirement” age and have penalty free access to their nest eggs?
Find your path. Start the journey, and achieve your financial independence.
Have you already started on your journey? Have you found your path? Have you achieved your financial independence? There are many of us here, including myself, that are new to the journey or haven’t even begun yet that could benefit greatly from your story. Will you share it with us?
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I’ve got an article I’m working on that hits Financial Independence, although it isn’t the complete point of the article (it’s more of a Retirement vs. FI point of view). In it, I of course quote Johnny Carson and Bill Murray – they probably have the top two Financial Independence quotes, well, ever… but I tend to agree with them. It’s the ability to say ‘no’ to things you really don’t want to do, without having to worry about your finances.
Good stuff!
Although I see your deeper discussion here, I have a kind of surface answer of the situation I’d like to create in my life. It goes like this:
First, I want to have a full retirement account stashed away, i.e., I just want $2.5M waiting for me somewhere and earning a little interest. Then, I want a nice, cushy $1M in savings to provide for extracurricular learning, taking advantage of opportunities, etc. I also want to have 2 fully stocked college funds stashed away for my future babies.
Second, I want to pay off my house and car loan in full.
Then, I want to make my monthly income from an occupation that is rewarding and fulfilling, and preferably from a business of my own design. That way I can give myself time freedom as much as financial freedom to travel, take time off to raise kids, etc.
In other words, I’ve reached financial independence when I’m DONE saving for big, big milestones and needing to work to fund those. It’s also about working when I want, earning what I want, and taking all the time off I want.
Right now, I give like, 35% of my money to “saving” (retirement, emergency, big vacations, etc.) and paying down debt. If I didn’t have to do that, I could live richer off of less total income.
Ahh…the fantasy 🙂
I have the same definition that you do – having enough money that you can choose what you do each day. You can work but don’t HAVE to work. We are aiming to reach that by age 50. We’re trying to get there with real estate, Roth IRA’s, and high dividend yield stocks.
For me financial independence means the freedom mostly to pursue what interests me, rather than mostly pursuing the dollar. The funny thing is, I’ve found that if you pursue what interests you and what you’re passionate about, the dollars often follow. And you’re happier!
I wrote a post about how it feels like to be financially independent. You might want to check it out sometime and see if it gels with what you think it might feel like.
I’d love to hear your perspective once you get there and whether it differs from my own!
My definition would be to have the freedom to not have money make decisions for you. Now, obviously that doesn’t mean you can blow it on whatever and whenever, but you you have freedom to choose what you want to do, and the thought of “how can I pay for it” or “but I can’t leave my job” doesn’t have to weigh you down.
I believe that there are different stages of financial independence. In my 20s my goal was to be debt-free, have investments, and be abel to get wasted on a Wednesday night!
I’m thankful that I worked like an animal in college to launch my business, work, and graduate debt free. I’m happy with where I am right now because I don’t have to worry about paying off any debt and I have money saved.
Next I want to increase my income and to continue traveling.
I do imagine that my priorities will change when I hit 30 or if I ever get married
I guess the best measure to determine your financial independence is being able to handle any major storm in life without depending on other people’s help.
I consider FI to be the same thing as being independently wealthy. Basically, not having to work for money, or being able to live off your investments.
In my mind, FI doesn’t imply anything about whether you are currently working, the hours you put in, or in what field you work. Only that you can walk off your job at any time and keep paying the bills as normal.
To me, it’s someone who doesn’t have to rely on others for money – including income from a job. While we have no debt and can financially support ourselves, we still rely on income from jobs to support our lifestyle. To me, if you were financially independent you wouldn’t need that. Your money would be working for you, not the other way around. We hope to get there by retirement.
Financial independence is only something you can determine. Some might be happy living with only $10K a year retired at 40 in some Third World country, while others want to retire withe more money (me).
My ideal of FI is more that I have the option to take a year or two off and travel (or do whatever) in between contracts.. and kind of do a SEMI-retirement thing that I’ve been doing since my late 20s, and grow a nest egg large enough to retire completely on once I hit my 50s or 60s.. or later, if I ever decide I want to retire.