Financial Independence – what is it really? Is it when you finally rid yourself of all debts and can actually afford to buy some bling with cash? Or is it when you finally have enough money socked away for that inevitable future emergency?
There are many different opinions about financial independence. Some of them are blatantly wrong (like the emergency fund statement above), while others are close but are stretched a bit so that financial independence becomes more achievable for them.
A little advice for you. Don’t dumb down financial independence just because you’re not even close. Learn what it truly is, decide if it’s for you. And if it is, then work your butt off to get there in the least amount of time possible!
What is Financial Independence?
Surprisingly, I think Wikipedia did the best job defining financial independence:
Financial independence (FI) is generally used to describe the state of having sufficient personal wealth to live, without having to work actively for basic necessities. For financially independent people, their assets generate income that is greater than their expenses.
Basically, once you create a regenerative income outside of work that allows you to cover your basic needs forever, then you’re officially financially independent.
Liz and I don’t often shout it from the rooftops, but we have a taste for financial independence. Not so much so we can quit our jobs and tell our bosses to shove it (for the record I would never do that Drew, you’re the man), but rather to have the freedom to do whatever we please when the time is right.
So how do we plan to get to a position of financial independence? How could we possibly earn enough outside of work to cover our basic needs?
- We got completely out of debt in 2014
- We flipped a house and saved like crazy to buy our first rental house with cash
- We’re developing this website, hoping to earn $1,500 a month or more in passive income
- We’ll earn dividend income through our stock investments
If the above goes as planned, we would earn approximately $2,500 a month (after tax), which would cover our fairly tiny budget of $30,000 a year. This would officially make us financially independent!
Others might try a few different things, like creating apps, writing books, or becoming a social media sensation. There are tons of ways to cover your living costs without working a day job.
Financial Independence is NOT the End Goal
If Liz and I boosted our online income by about $500 a month, then we could officially call ourselves financially independent and voluntarily sequester ourselves to the beach each and every day. It really sounds tempting, not going to lie, but we’re just not going to do that.
Because our end goal is not financial independence. We want more.
As much as it sounds like it, it’s not a greedy thing. Honest. It’s a more practical approach for our future happiness.
If our income just barely covered our expenses, then sure we’d be financially independent, but what if our expenses increased (after all, we DID just start having kids)? And what if one of us came down with a terrible sickness that cost us an arm and a leg in hospital expenses? Earning enough to solely cover our basic needs does not sounds like the best of solutions….
Thanks to an awesome post by Radical Personal Finance, we now realize that we have two more steps to take beyond financial independence:
- Financial Freedom
- Financial Abundance
We don’t just want to scab out an existence. We want to be financially free to do what we want – not to just cover our basic needs.
We have the desire to travel, to send our kids to private schools, and to own acres of property (we currently own a whopping .15 acre city plot….NOT exciting). To get here, we’ll have to do more to earn more.
The current plan?
- Buy another rental property with cash by December, 2017
- Save up $200,000 to buy a modest home on 7+ acres in a nearby town
- Move out of our existing (paid for) house and rent it out
With three rental properties and our dream plot of land (with no debt remember), we’ll have roughly $5,000 of after-tax income. Plenty to cover the basics, PLUS travel, AND private education for the kiddos. This plan will take extra time, but we can still get it done by the time we’re 40 years old!
We’re not quite done yet. Beyond financial freedom comes financial abundance. Dave Ramsey calls it Step 7: Leaving a Legacy. This is the point where you earn enough outside of work to fund the basics (financial independence), the extras you’ve always dreamed of (financial freedom), and then a surplus (financial abundance).
That’s right, when you’re financially abundant, you’re essentially earning more money than you know what to do with. Buying more stuff probably won’t add much to your happiness level at this point (think the law of diminishing returns), so what should you do with it?
(If you have no clue, then I’d recommend not making this step your life’s goal.)
If, on the other hand, you immediately think about three different organizations that could use your financial help, then perhaps this step is right for you.
For Liz and I, the plan to get here wouldn’t be largely different than our plan for financial freedom. Basically, it would just include working a little longer and adding some more real estate to the mix (P.S. extreme wealth doesn’t have to be complicated). For instance, instead of three properties, we’d likely shoot for five or six (which would earn us another $2,000-$3,000 a month). It might take us an additional three years to achieve this, but think of what we could do with an extra $24,000-$36,000 a year! That could really make an impact on someone’s life!
Life Beyond Financial Independence
From what I’ve been reading, the recent fad is to voluntarily live a life of near-poverty (crappy car, flip phone, and all home-cooked meals)….for life….
Why on earth would someone do this?
If one could reduce their expenses to just $10,000 a year, then they could conceivably save up just $250,000 and live off the interest for life. Meaning…they could gain financial independence by living in poverty forever. You wouldn’t ever have to work another day in your life, but you’d be strapped for cash each day as well.
…..not for me.
I don’t spend that much money, but I also like to have plenty of it in my bank account…and plenty of it feeding into my bank account each month. Liz and I could probably buckle down and be financially independent in this very instant, but would we be happy? Nope. We’d constantly be watching our pennies and would soon be stressed out of our gourds!
For us, financial independence is not the end game. We’ll be shooting for financial freedom for sure, and possibly even targeting financial abundance.
What are you targeting? Financial independence or beyond?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.