What is Financial Independence? Here’s a Hint - It’s Not About How Much Money You Have - The Plutus Foundation (2024)

What is financial independence? It seems like an easy question. But when you dig into the term “financial independence,” you’ll find that there’s no clear-cut definition.

A quick online search will yield answers like “not having to rely on others to meet your financial needs” or “having enough income to pay your living expenses for the rest of your life without needing to work.”

Or you’ll find more specific directives like “accumulating a nest egg that allows you to safely withdraw 4% from your retirement account each year.”

So, why are there so many different answers to such a basic question?

There’s no universal approach because each person must decide their own financial and lifestyle goals. And the journey to achieve these goals is what financial independence is all about.

Misconceptions about financial independence

Financial independence — or financial freedom — looks different for everyone. But there’s some general misconceptions about financial independence that can hinder or sabotage the process.

Do you really have to be rich?

One of the biggest misconceptions is the idea that you have to be rich to be financially independent.

This belief not only prevents people from starting their financial independence journey, but it’s downright not true. Many financially independent people live minimal to modest lifestyles that allow them to maximize their financial situation without having endless amounts of money.

It’s also not about reaching a specific dollar amount and then suddenly being free from financial worries.

For example, old school financial guidance placed $1 million as the benchmark for retiring comfortably. But depending on your lifestyle and retirement goals, you might need significantly more. Or you might be perfectly happy with substantially less.

That’s why financial independence is reflective of the individual. It factors in your hopes and dreams, your current and future lifestyles, your career and retirement goals, and so much more.

Do you need to be retired?

The idea of retirement is another factor to consider. Do you need to be retired in order to consider yourself financially independent? Before people can answer this question, there should be some agreement on what it means to retire, and one person’s definition of retirement might not match another interpretation.

You do not necessarily need to stop working in order to be financially independent. Many of those who have reached this stage continue to work, but are free to choose the work they do and are able to spend their time on work that is personally meaningful.

An aspect of financial independence is the ability to make decisions without the pressure and stress of the consideration of financial impact — or at least a reduction of those concerns. But it’s a misconception that financial independence allows for total ignorance of your money situation.

While you may give up your corporate job, many start side hustles or hobbies that bring in some money. For example, someone might start teaching piano part-time simply because they enjoy it.

That extra income isn’t strictly necessary but it does allow you to add some luxuries to your life, or stretch your nest egg even further.

Do you have to save so much that you aren’t enjoying life today?

How much you sacrifice today is up to you.

One path to reach this life stage relies on behaviors of extreme penny-pinching and attitudes of miserliness. Some proponents will spend an hour a day searching for deals to save as much money as humanly possible for any necessary household expenses.

You may be tempted to work to save 50 percent of your income, lest you never reach your goal.

But extreme frugality is not the only path. Financial independence requires looking at every aspect of your situation carefully. Lifestyle changes can have a considerable impact on this path. You may decide that you’re willing to sacrifice in some areas of your life, but you don’t want your quest to reduce the quality of the enjoyment of your life today.

Is financial independence achievable for anyone?

Financial independence is more achievable for people who have certain privileges, like a lack of a discriminative social standing, due to race, color, origin, religion, sex, etc., and a supportive and stable environment, where your earliest years of work don’t need to be in service of a struggling home environment.

This misconception about financial independence here is that the ability for one person to achieve a goal means that any other person carries the same ability: “If I could do it, so can you” — that hackneyed motivational platitude. There may be obstacles so insurmountable that financial independence is beyond the reach of a person’s lifetime.

When basic survival is under threat, thinking about ideas like financial independence is a luxury.

It’s unlikely, however, that anyone reading this article is in that position of absolute futility. But the reality is that different people have different obstacles. Some of these deterrents may only be removed through actions bigger than any one person, and different life situations call for different priorities.

At its core, financial independence is about being intentional with your money — how you make it, how you save it, and how you spend it.

What is financial independence to you?

Figuring out your own definition of financial independence is part of the journey. It’s the first step in a long process that requires commitment and intention. But it’s one of the most important steps as it’ll provide you with clarity and direction.

So, how do you figure out what financial independence means to you?

Start with some self-discovery questions. Ask yourself questions like:

What are my hopes and dreams? These might include big goals like expanding your education, pursuing a new career, starting a family, building a business, or moving to a new area. But they might also include more simple hopes and dreams, like reconnecting with loved ones or providing a stable environment for your children.

If you’ve never given yourself the opportunity to think about your hopes and dreams before, today is the best time to begin. If you’re finding it difficult to nail down, try imagining what you would like your legacy to be, what you’d like to be known for, or what you love about the people you admire the most.

What hobbies or interests would I pursue if money were no longer a concern? Many of us dropped or ignored our true interests in pursuit of jobs that paid the bills. Think about what hobbies bring you happiness and how you could build a life around those activities.

Following your passion isn’t guaranteed to be a path to financial independence, but it could lead you to interesting discoveries. For example, who knew that so many people would make a comfortable living from playing video games, an activity considered frivolous by parents of teenagers everywhere?

If your passions and skills coincide with something people need and are willing to pay for, your path is clear. A few will use their passions to convince the world that a new need exists.

But if your interests lie outside marketability, consider what you need to do to arrive at the moment where you have the financial wherewithal to pursue them without concern for earning more.

What habits (financial or other) are causing stress in my life? Unhealthy habits like making late payments or doing excessive online shopping bring more anxiety than joy. Pinpoint which habits have gone unnoticed or unchecked over time.

Consider more than just your habits with money. Good health makes it much easier to pursue financial independence. Can you make improvements in your life that encourage you to be healthier?

Sleeping better, maintaining good hygiene, increasing physical fitness, and eliminating smoking are some simple and relatively easy changes to make that not only help you achieve financial independence but make that journey more enjoyable.

What do I want my family’s future to look like? Your financial decisions have long-term effects on your entire family. Envision what you want the future to look like for each family member and for the family unit as a whole.

Take the time to discuss these goals and your intentions with your family, as well. If there are others close to you who would be affected by your decisions, involve them at a level appropriate for your relationship with them.

Use these discoveries as the foundation for establishing what financial independence means to you.

And be sure to include your partner in the discussion to ensure you’re both on the same page with your life and financial goals.

Common financial independence goals

Once you’ve figured out what financial independence means to you, you’ll need to start building specific goals that will push you forward.

Common goals related to financial independence include:

  • Becoming consumer debt-free (by paying off credit cards and auto loans).
  • Building a large emergency fund to cover at least three to six months’ worth of living expenses.
  • Paying off your home mortgage ahead of schedule.
  • Having the ability to quit, retire, or change jobs without money being the main decision factor.
  • Positioning yourself to be able to start a business or pursue other dreams without fear of losing your primary income.
  • Becoming entirely work optional, allowing you to choose if and when you work.
  • Increasing your savings rate to put you on track for early retirement.
  • Being financially secure enough to pay the bills, save and invest — all while still enjoying life without making major financial sacrifices.

These types of major financial milestones help to shape your definition of financial independence and provide you with a roadmap to achieve it.

Here’s how to stay motivated to work towards your financial goals.

Use your definition of financial independence to create a plan

Everyone’s financial independence journey is unique. We all start in different places, make different decisions, have different timelines, and set different goals.

But a well-thought-out plan can give you motivation and serve as a grounding tool if you get lost along the way.

Create action plans for each goal you set, including the strategies you plan to use to achieve them.

For example, if your immediate goal is to pay off debt, you can implement strategies like:

  • Increasing your income by picking up extra shifts or starting a side hustle.
  • Cutting expenses and practicing a more frugal lifestyle.
  • Using the debt snowball or debt avalanche methods to stay motivated.

Your plan might focus on working your way through a priority goal, like building your emergency fund, before moving onto other goals. Or it might incorporate strategies that allow you to chip away at multiple goals at the same time.

Get serious about your savings rate and investments

If your main goal of financial independence is long-term security, you’ll need to do more than just pay off debt or live within your means.

You’ll need to increase your savings rate. And start making your money work for you by investing it.

Everyone’s risk tolerance for investing is different, so there’s no one-size-fits-all approach to growing your wealth.

For example, many people choose to stick to index funds, which are generally cost-effective and don’t require you to pick individual stocks. While others choose more hands-on investment opportunities, like managing rental properties because they have the potential for large cash flow.

There are a variety of investment tools, so you’ll need to be a student of finances and do your research to find what’s right for you.

Also read: Declare Your (Financial) Independence: 4 Things You Need to be Financially Free

Financial independence is a long game

Financial independence isn’t about how wealthy you are. But rather, it’s about having the ability to choose your lifestyle without constant money-related stress. It’s about picturing the life you want to lead, and then taking financial steps to build your own path.

But financial independence doesn’t just happen overnight. So, your journey will likely ebb and flow as you move through different stages of life.

Therefore, you’ll need to re-evaluate your financial independence goals and plan periodically to ensure you’re on the path that fits your current and future needs.

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Understanding Financial Independence

Financial independence refers to the state of having enough resources or income to meet your financial needs without relying on others or needing to work. It is often associated with the ability to cover your living expenses for the rest of your life without being dependent on a job or external assistance.

Different Definitions of Financial Independence

There is no one-size-fits-all definition of financial independence, and different sources might provide varying perspectives. Some definitions focus on accumulating a specific nest egg or retirement savings that allow you to safely withdraw a certain percentage (such as 4%) each year. Others emphasize the ability to cover living expenses without needing to work.

The lack of a clear-cut definition is due to the fact that financial independence is a highly individualized concept. It depends on your unique financial goals, lifestyle preferences, and retirement plans. Each person must consider their own circumstances and determine what financial independence means to them.

Misconceptions about Financial Independence

There are several misconceptions surrounding financial independence that can hinder or sabotage the process. It is important to address these misconceptions to gain a better understanding of what financial independence truly entails.

  1. Being Rich: One common misconception is that you have to be rich to be financially independent. However, many financially independent individuals lead minimal to modest lifestyles and prioritize maximizing their financial situation without needing vast amounts of money. Financial independence is about aligning your financial resources with your personal goals and values, rather than reaching a specific dollar amount.

  2. Retirement: Another misconception is that financial independence requires retirement. While some people choose to retire early once they achieve financial independence, others continue to work but have the freedom to choose the type of work they do. Financial independence allows individuals to make decisions without being solely driven by financial considerations.

  3. Sacrificing Enjoyment: Financial independence does not necessarily mean sacrificing enjoyment in the present. While some paths to financial independence emphasize extreme frugality and penny-pinching, others focus on making intentional lifestyle choices and finding a balance between saving for the future and enjoying life today. It is a personal decision that depends on your values and priorities.

  4. Accessibility: Financial independence may be more achievable for individuals who have certain privileges, such as a supportive and stable environment or lack of discriminatory social standing. However, it is important to recognize that different people face different obstacles and have varying life situations. Absolute financial independence may not be feasible for everyone, but taking steps towards financial stability and autonomy is still valuable.

Defining Financial Independence for Yourself

Defining what financial independence means to you is a crucial step in your journey towards achieving it. Consider the following self-discovery questions:

  1. Hopes and Dreams: Reflect on your aspirations and goals, both big and small. Consider your career, education, family, personal interests, and what you want your legacy to be.

  2. Passions and Interests: Identify the hobbies or activities that bring you joy and fulfillment. Imagine how you could build a life around those interests if financial constraints were not a concern.

  3. Habits: Evaluate your financial and non-financial habits that may be causing stress or hindering your progress. Identify areas where you can make improvements to support your journey towards financial independence.

  4. Family's Future: Envision what you want the future to look like for yourself and your family. Discuss your goals and intentions with your loved ones to ensure alignment and mutual support.

By answering these questions and engaging in self-reflection, you can establish your own definition of financial independence and use it as a guide in setting specific goals.

Common Financial Independence Goals

Once you have defined what financial independence means to you, it is important to establish specific goals that align with your definition. Some common financial independence goals include:

  1. Debt Freedom: Paying off consumer debt, such as credit cards and auto loans, to achieve financial stability.

  2. Emergency Fund: Building a substantial emergency fund that can cover at least three to six months' worth of living expenses.

  3. Mortgage Payoff: Paying off your home mortgage ahead of schedule to eliminate a significant monthly expense.

  4. Career Flexibility: Positioning yourself to have the ability to quit, retire, or change jobs without being solely driven by financial considerations.

  5. Business Ventures: Creating the opportunity to start a business or pursue other dreams without the fear of losing your primary income.

  6. Work Optional: Increasing your savings rate and investments to the point where you have the choice to work or not.

  7. Early Retirement: Saving and investing aggressively to achieve early retirement or financial independence at a younger age.

  8. Financial Security: Striving for financial security, which allows you to pay bills, save, invest, and enjoy life without major financial sacrifices.

Establishing these goals, along with actionable plans and strategies, will provide you with a roadmap to achieve your version of financial independence.

Staying Motivated and Making Progress

Achieving financial independence is a long-term journey that requires commitment, discipline, and periodic evaluation. Here are some tips to stay motivated and make progress:

  1. Create a Plan: Develop a well-thought-out plan with specific action items for each goal. Consider strategies like increasing your income, cutting expenses, and utilizing debt payoff methods.

  2. Increase Savings and Invest: Focus on increasing your savings rate and consider investing to grow your wealth over time. Explore different investment options and find what aligns with your risk tolerance and long-term goals.

  3. Periodic Evaluation: Regularly review and adjust your financial independence goals and plans as your circumstances change. Life is dynamic, and your financial journey may require adaptations along the way.

Remember, financial independence is not solely about wealth accumulation but about having the freedom to choose your desired lifestyle without constant money-related stress. It requires intentional financial decision-making and aligning your financial resources with your values and aspirations.

What is Financial Independence? Here’s a Hint - It’s Not About How Much Money You Have - The Plutus Foundation (2024)
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