What is financial independence?
Ok, so if you’re here it’s probably because you’ve heard of the concept of financial independence.
In the news media, it’s often described as something like this:
“You’re so rich you don’t need to work for the rest of your life”
Well, while there is some truth to that, we also have to admit that it’s pretty useless.
Most rich people actually work much more than the average person. That’s how they became rich, but they’re not stopping to work. Often they simply want more and more. Or they’re seeking something other than freedom.
Financial independence is not something that comes from rich people. Financial independence is the way regular people build financial security to create freedom in their lives.
“Right, so you’re saying regular people can achieve financial freedom?”
“Financial independence… is it a scam? “
That’s probably how I would have reacted to those words 12-13 years ago… but after learning what it is and having achieved financial independence at 33, I have now of course become a big proponent of it.
And that is because financial independence is in fact something most people aspire to… but rarely really think about seriously…
So what is financial independence?
In this article, we go back to the basics and explore the various definitions of financial independence!
And more than just the goal of reaching financial independence, we also discuss the journey to FI.
We also explore all the incredible benefits of financial independence, from a greater sense of security to greater control over how we use our time and energy.
Definitions: What is Financial Independence?
Financial independence can be defined in many different ways. Here are a few simple definitions that I have seen being used.
- Financial independence is the ability to not have to rely on others to meet your financial needs.
This definition focuses on being independent from others. This is very broad and can be interpreted in many ways.
For example, when we get our first paid job, we become independent from our parents who were paying for our expenses until then. Another example if when we finally pay back some debt, ending our dependence on the lender. In both of these examples we gain a level of financial independence. To me these are examples of very important steps that are part of the financial independence journey.
- Financial independence is having enough recurring passive income to pay your living expenses for the rest of your life without needing to work.
This definition focuses on the passive income side of things. The idea of being able to live your dream life after creating passive income is not new. In fact it’s being abused by the vast majority of wanna be financial gurus out there.
The issue with the concept of passive income that is used in tons of marketing (and scams) to attract people’s attention. But it’s often a false promise.
True passive income from businesses is quite difficult to achieve as the vast majority of passive income streams either require work to maintain or can simply disappear when circumstances or markets change.
One very passive source of income that you will read a lot about here is index investing as it is a solid evidence based approach to growing wealth on autopilot through the stock market. It takes time to learn about and put it into practice (from a few weeks to a few months), but once it’s in place it takes about 5 minutes per month.
- You’re financially independent when you have accumulated a nestegg big enough that you can withdraw from it and live from it indefinitely.
In this definition the focus is on having a big enough net worth that you can withdraw from it without depleting it, or even better, that you can withdraw from it less than what it grows (when the average return of your capital exceeds your cost of living).
This works for example with index investing. The stock market averages an annual growth of 6 to 10% over the long term, withdrawing a fraction of that allows for the portfolio to last for a very long time. Given historical data, a balanced portfolio of bond and stock index funds has a very small chance of depleting is one withdraws 4% of it per year and an almost 0 chance of that happening if withdrawing 3%. This is known as the 4% rule of thumb.
- Financial independence is having the choice to work or not, the freedom to decide what to do with our time, without the usual money constraints.
This definition doesn’t focus on a certain amount of money or cashflow, but rather on the ability to make decisions independently from money constraints.
In a way, this is the real freedom and autonomy people are usually aiming for when pursuing financial independence.
And it can be obtained by building recurring passive income or by building a big portfotolio, but it can also be built with lower financial resources: with flexibility and the right mindset.
If you’re flexible in the way you earn money and can be comfortable with a lower level of financial security, you can get to a point where you can make decisions with money being the main constraint.
An example would be someone who has some investments in place and decides to go part time or move to a lower paid job to increase his/her quality of life. This is sometimes referred to as Coast FIRE or Barrista FIRE.
It’s basically a way to get more freedom without having to wait and work all the way to full financial independence.
As you can see there are a lot of different definitions for financial independence.
The one that resonates most with me is
- Financial independence is having control over how you spend your time and energy, without money being the main criteria (or not at all) – independent from the usual financial constraints.
Of course, this is very personal and depends on your personal situation, your mindset, where you live, as well as your goals and aspirations.
Financial independence is a journey
But financial independence is not just that goal of reaching this point where you don’t need to work for money.
Financial independence is the entire journey.
It starts wherever you are today. It starts when you realize you can take control of your finances and improve your situation.
From there, with every euro you save, you build financial security and freedom. Step by step, you take back control of your life.
- Getting out of debt is financial independence
- Getting your first job is financial independence
- Learning to track your expenses is financial independence
- Saving your first 1000 euros is financial independence
- Investing for the first time is financial independence
- Building your emergency fund is financial independence
- Taking unpaid leave (or reducing work commitment) to care for someone you love is financial independence
- Taking a strong position when negotiating at work is financial independence
Each step you take to improve your financial situation is part of the financial independence journey.
If you’re here, you’re already on the journey to financial independence, congrats 🙂 ?
Benefits of pursuing financial freedom
The beauty with pursuing financial independence is that you can enjoy the benefits as soon as you start on the journey!
In addition to the increased financial security and freedom that you build along the way, you will also gradually gain greater peace of mind and confidence, as well as greater control over how you use your time and energy. Pursuing financial freedom will also allow you to make better decisions and be in a better position when you have to negotiate. It’s a real game changer in many areas of our lives. To learn more, check out the Top 5 benefits of pursuing financial freedom.
To continue your journey, here are a few things you can do:
- Join the FIRE Belgium Facebook Community
- Sign up to the FIRE Belgium Newsletter
- Subscribe to the FIRE Belgium Show, on YouTube, Apple Podcasts, Spotify, or Google Podcasts.
- Connect and say hi on LinkedIn or Facebook!
- Learn about index investing! Check out the free workshop where I share the key principles and my roadmap to get started.
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