What is financial independence


Financial independence in my mind is akin to freedom. It's about having choices, owning your time and having the freedom to do what you're passionate about.

In this article I talk about what financial independence is and what I feel it can bring to your life.

The text book definition. Yawn...

A text book definition of financial independence is something along the lines of:

When you have enough passive income to cover your living expenses without the need to rely on a salary

So in other words, once you've built up enough wealth and income from things like investments, dividends and property such that they could cover your expenses, you can consider yourself financially independent.

But that dry, text book definition doesn't get to the heart of what financial independence can bring to your life.

A life with choices

More than anything else I equate financial independence with choices. It's about having the freedom to choose how I live my life and what I spend my time doing. Financial independence means not being a slave to your salary.

Maybe I don't want to be forced to work for someone else until I'm 65, with the hope that I'll enjoy the freedom I eventually have in my last few golden years. Achieving financial independence can make retiring early a reality.

Or maybe I would rather work part time while using the rest of my time to do something I'm really passionate about. Financial independence will give me that option.

In truth I love my job. I'm a software developer and have enjoyed coding since I was 15. When I reach financial independence I'll likely continue working either independently or for a company. The difference being that I won't have to worry about retrenchments or salary. I'll be working because I choose to and will have the freedom to quit back at any time.

Who knows, maybe I'll decide that I want to quit my job and become a professional lego builder (yes that's a real job and yes it sounds awesome!).

The idea of being able to pay for expenses without relying solely on a salary, owning my time and having the freedom to choose how I spend it is incredibly empowering and I feel it's something worth striving for.

A life without financial independence

Being reliant on a salary is how most of us live our lives. After all, those bills aren't going to pay themselves.

Of course there's nothing wrong with enjoying our work and loving the company we work for. But if our salary is the only way we have to pay our bills, there's sacrifices being made:

  • First and foremost, our time is not our own. The company we work for owns our time.
  • If we lose our job for any unforeseen reason (retrenchment, illness etc) we're all of a sudden in a world of trouble.
  • We have to slog it out 9 to 5, Monday to Friday, come rain or shine.
  • We spend more waking time at the office in any given week, month or year than with our family.
  • Our focus is on climbing the salary ladder rather than doing what we're passionate about.

Retirement isn't an age

Generally retirement is thought of as that fateful day (somewhere around 65 years of age) when we stop working and live off our pension or investments for the rest of our lives.

Sure, it took 65 years to get here, but now is finally the time to really sit back, enjoy life, see the world and take up a few hobbies. Right?

While that's certainly one option, I'm taking a different route. I would rather reach financial independence in 10-15 years allowing me to have unlimited choices for how I live the rest of my life.

As I mentioned, I enjoy what I do so I probably won't stop working completely once i've reached financial independence. I will however consider myself retired at that point because what I do with my time and the work I choose to do will be completely up to me. Most importantly, those choices will have absolutely nothing to do with salary and everything to do with happiness.

The earlier we reach that target, the earlier we claim back our time and get to choose what we do with it.

So the question becomes, is retirement (aka: financial independence) possible with anything less than 40 years of working?

Enter FIRE...

FIRE - Financial Independence, Retire Early

FIRE is about lowering expenses and investing a large percentage (typically at least 50%) of your salary to reach financial independence earlier than 65 years of age.

I won't go into the specifics and various FIRE strategies here (I'll leave that for other posts in which I dig deeper into the topic). But the basics of FIRE are:

  • Lower your expenses (be thrifty).
  • Eliminate your debt.
  • Invest at least 50% of your income.
  • Once your investments have reached 300 times your monthly expenses (or 25 times your annual expenses), you've reached financial independence.
  • At this point, you're able to live off of what's referred to as the safe withdrawal rate of 4% from your investments. This is known as the 4% rule.

Obviously there's a lot to dig into here since this just scratches the surface of a big topic. I'll leave that for other posts where I go into the specifics of FIRE, run the numbers and look at various strategies.

Wrapping up

Financial independence (and FIRE) is not a get rich quick scheme. It's about taking a long hard look at your income, expenses and investments to figure out what's important in life and creating a long term plan from that.

FIRE is about ensuring you have choices in life, owning your own time and having the freedom to pursue what makes you happy. Most importantly, it's about achieving this in less than 40 years of working.

Article by Brendon @ Money FI

Share this post