I remember hearing the term “Financial Independence” very early in my studies of finance. It probably was in the 90s, when saving for retirement, 401ks and retiring early was the ultimate goal in life. Financial independence meant retiring well, with a seven figure 401k account. Remember ING coined the phrase, “What’s Your Number?”
The classic definition of financial independence was more about being rich. It involved accumulating enough income producing assets to live off of the passive income generated from the assets. The downside of this definition was that it assumed maintaining or improving your current standard of living. That is not a bad thing; it just required a larger sum of assets to produce enough income to meet those needs; hence retiring wealthy. The term was more synonymous with living the American Dream of wealth, luxury, and travel.
Jim Rohn said it best: “To become financially independent you must turn part of your income into capital; turn capital into enterprise; turn enterprise into profit; turn profit into investment; and turn investment into financial independence.”
Wikipedia defines financial independence as the state of having sufficient personal wealth to live indefinitely without having to work actively for basic necessities. This definition focuses more on the freedom of not having to work to meet your basic needs, not necessarily wealth accumulation. If your expenses are $2,000 and you generate passive income in the amount of $3000, then by this definition, you are financially independent.
Since the notion of independently wealthy is unattainable for most, another definition of financial independence is the experience of meeting your needs, with some left over. The focus is less on wealth accumulation to having enough. Enough is attainable and personal. What is enough for you may be a different number for someone else.
The new emphasis is “Financial Freedom”. Brian Tracy defines the financial freedom number as the amount of money needed so that you will never have to worry about money again.” While Suze Orman says, “A big part of financial freedom is having your heart and mind free from the “what-ifs” of life”.
Financial freedom may mean to be debt free or to no longer clock in with an employer. Financial freedom encompasses effective personal money management: spending less than you earn and eliminating debt, and saving and investing. It is the degree that you manage your money wisely, allowing you to live the life you choose. I like to call it, a life of freedom and purpose.
Action step: Define what financial independence means to you and begin the steps to liberate yourself, financially.