Financial independence is a place you reach when you have enough income each month to cover your expenses and where a significant proportion of that income is generated passively. This means you don’t need to be actively working to make a living.
Being financially independent also means you’re debt-free and (ideally) mortgage free and that you have sufficient savings and investments to handle both short-term emergencies and maintain a good standard of living throughout your life.
So that’s the technical explanation, but in human terms financial independence means a lot more.
For a start there’s the freedom of choice. When you’re not reliant on a job to make a living you can choose how you spend your time. You can step off the treadmill and do creative work that fulfils your needs, you can follow your passions, do more things to help others and spend more time with friends and family – whatever appeals.
Financial independence also means the stress and anxiety caused by worrying about bills and debts is no longer a problem. Knowing you’ve got emergency savings always helps with a good night’s sleep.
Ultimately financial freedom is about being an independent individual. You can make your own choices, you don’t need to rely on others to get by and you don’t need to ask permission to do what you want to do. I’m talking figuratively here of course – everyone needs someone and we all need to be nice, but as an independent individual you can be strong for others and don’t need to take any c%#p 🙂
Financial independence is all relative
You don’t need to be super rich to be financially independent. People living very ordinary lives can also build their wealth to become independent. The rule of thumb says you need investments worth 25 times your annual expenses.
So say you need to spend £50,000 a year to live well, you’ll need 25 x £50,000 = £1,250,000 of investments to draw an income on.
But if you’ve paid off your mortgage and can keep your expenses low, maybe you’re able to live on £25,000 a year, in which case you’ll need 25 x £25,000 = £625,000.
Not an insignificant amount of money, but not impossible either. It is more a case of lifestyle choices. Choosing to live in a smaller house and avoiding lifestyle bloat helps you avoid debt and provides more scope to save and invest.
Instead, many people prefer to spend outwardly on things that amplify their status or meet other aspirations in life. Investing for the future is not a priority and so retirement becomes a very unrealistic dream. There’s nothing wrong with this choice, after all we’re all consumers by nature. The point here is to highlight there are other pathways.
It doesn’t have to mean retirement
You may have come across the term FIRE. It stands for Financial Independence Retire Early. For me the ‘Retire Early’ bit doesn’t appeal. I like my career too much to want to give it up. However, in the future I see a time when the ‘Financial Independence’ bit would enable me to afford to cut back on the less interesting parts of my work and focus on the things I like best.
I also think having a mixture of active income (from a job) and passive income (from investments) is a great way to protect yourself from dips in the market when your investments don’t do what they should (meaning your passive income drops). Not to mention the ongoing health benefits of keeping your mind active.
Personally I don’t think there is any hard or fast rule about what makes someone financially independent. The FIRE community talk a lot about different variations of FIRE, such as LeanFIRE, FatFIRE and BaristaFIRE – whatever floats your boat really…
To me perhaps the most important part is having a reliable income that covers expenses, but doesn’t require clocking in on a beautiful sunny day 🙂