Financial Freedom vs Financial Independence, What Comes First?
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Have you heard about the "latte factor" – that seemingly small daily expense, like a fancy coffee, that can eat away at your budget over time? But the truth is, it's not just lattes that can hold us back.
It's the constant stream of everyday expenses, from subscriptions we barely use to impulse purchases at the checkout line that add up, leaving us feeling stuck in a financial grind.
What Is Latte Factor?
What if you could treat yourself to that latte without guilt, or even have a croissant sandwich to go with it because you've built a solid financial foundation? Wouldn't it be liberating to say "yes" to a last-minute concert with a friend, or to take a weekend trip without worrying about breaking the bank?
Our day begins with financial responsibilities and ends with them. Money not only makes the world go round but also controls us, our actions, our plans, and our thoughts. Can we achieve financial freedom and take charge of how we spend instead of the amount of money dictating to us?
Or do we want financial independence? But wait! Aren’t both the same? Both mean freedom from being dependent on others for money but there is a difference. Both terms though used interchangeably liberate us from the shackles of money dictating our actions.
This article will help navigate both. From living your dream life and maintaining your lifestyle to covering your expenses and having the freedom to work without a regular job.
We'll explore financial freedom vs financial independence, how to determine which one you want, and how to achieve financial freedom and financial independence. Let’s get started!
A. Financial Freedom Vs Financial Independence
Financial independence means having enough income to cover your expenses so you don’t have to work. The income can be a rental from a property you invested in, trust funds, inheritance, or investments - passive income.
Whereas financial freedom is having the power to choose what you do with your time and live the life you want. It goes beyond just meeting your basic needs and gives you the flexibility to make choices based on your values and passions.
Financial freedom is building the wealth you get from financial independence with your passive income and the profit you generate from it.
Difference Between Financial Independence and Financial Freedom
Let’s look at the example of Grant Sabatier, the author of the book "Financial Freedom at 30" and the creator of the website Millennial Money. At 24, he only had $2. Five years later, he had $1.25m. How did he do it?
Sabatier achieved financial Independence by:
Investing: He wisely invested his earnings, allowing his money to work for him through compound interest. (earning interest on your interest, making his money grow faster)
Building a Blog: He grew a successful blog focused on personal finance, generating income through advertising and affiliate marketing.
Freelancing: He also took on freelance writing and consulting gigs on the side.
After reaching his financial independence goal, Sabatier didn't need a traditional job. He achieved financial freedom by:
Traveling the World: He spent several years traveling extensively, pursuing his love of exploration and new experiences.
Selective Work: While not dependent on a paycheck, he occasionally takes on projects that interest him, like writing his book and maintaining his website.
Focus on Passions: He prioritizes activities he enjoys, such as volunteering and spending time with loved ones.
Look at it this way - financial independence is the stepping stone to achieving financial freedom. The first is controlling your finances and the second is having the power to choose.
Which one do you want?
B. What is Financial Independence?
Financial independence isn't just a dream; it's a fortress you can build, brick by financial brick. It focuses on freeing you from financial worries, going beyond the survival mode of making enough money to pay the bills.
Financial independence gives you peace of mind, stability, and flexibility to easily maintain your lifestyle without having to slave at a regular job or depend solely on your paycheck.
What is Financial Independence?
You could:
Do what you love: Start that library, travel the world, or write that novel.
Spend time with loved ones: Volunteer, coach your kid's team, or simply enjoy worry-free moments with family.
Work on your terms: Take on freelance projects you find fulfilling, or even retire early.
But before you start laying the foundation for your financial fortress, it's important to understand what and how of financial independence.
Passive Income: This is income that comes in regularly without requiring your constant effort. Examples include rental properties, investments, or royalties from creative endeavors like books, music, screenwriting, etc.
Low Expenses: Living below your means gives you more financial breathing room to achieve your goals.
Freedom of Choice: Financial independence empowers you to make life decisions based on your values and passions, not just your paycheck.
Building your financial independence takes discipline and planning and the financial freedom you achieve after it is worth it.
Here’s how you can start:
Craft a financial plan: Set goals. Say you’re earning $5k monthly. Your expenses like rent, groceries, bills, and loans are $3k. Set aside $k for petty and daily needs and save $1k.
Generate passive income: In a year you will have $10k. Invest that into shares, bank interest, investment schemes, etc.
Live frugally: Discover smart ways to save money without feeling deprived. Eat well at home and save money dining out. Bring down your $3k expenses to $2k.
Manage your debt: Learn effective strategies to pay down debt and avoid the burden of high-interest payments. Resisting impulse buys like an expensive latte on the way to work or a stunning dress. Lock your credit card and don’t use it until you have. Prioritize paying off debt so that it stops draining your expenses.
C. Financial Independence Lead To Financial Freedom
Financial freedom isn’t a myth. It’s not this impossible dream that’s only for famous people.
Financial freedom is a reality that involves struggle, consistency, and hard work all wrapped up in a gradual process.
Financial independence is building a sturdy bridge to a land of opportunity. This bridge represents passive income streams, like rental properties or investments, that cover your essential expenses. Once you are through this, you get closer to achieving financial freedom.
Once you cross the bridge, you're no longer chained to a traditional job or slave to financial responsibilities like making rent or scraping money for a vacation every 5 years. With financial freedom, you’re the master of your destiny and choices.
In the next section, we’re going to break down th path to financial freedom, helping you understand hoe financial independence plays a pivotal role in helping you achieve financial freedom.
I. Climbing to Financial Independence
Financial stability is the first rung on a ladder to your financial future. It's that feeling of being secure, knowing you can handle unexpected situations. Think of it as having a safety net – an emergency fund to cover unexpected bills and manageable debt payments. With financial stability, you're not worried about making ends meet every month.
Financial independence takes you a step higher on the ladder. Here, you're not just surviving, you're thriving! You are now secure with your finances and have crossed the survival mode of living from paycheck to paycheck. You can now choose when and if you want to work because you have a passive income to maintain your lifestyle.
Let’s approach the concept of financial freedom with an example. Angela is a professor at a university. She’s slowly worked her way to this position, starting as a teacher in high school, enrolling in a community college for further studies, and becoming a college professor.
a) Angela’s Path to Financial Stability
Angela started working right after university, living frugally with minimal expenses and slowly paying off her student loans. She’s always kept a tight budget to pay off her student loans and has a savings fund for emergencies. After 10 years, Angela has achieved financial stability- she has no loans, can pay her expenses comfortably, and has a steady job and a safety net of savings.
B) Angela’s Path to Financial Independence
Now Angela wants to achieve financial independence, i.e. not depend solely on her job for her lifestyle. She invests part of her savings into an investment scheme and begins receiving income from it.
Angela now has two income streams, one from her job and another from her investment. However, she’s still dependent on her job to maintain her lifestyle and current expenses. So she saves the profits from her investment and puts them in shares to increase her income.
At this point, she has enough income to quit her job and live on the money from her passive income. Angela is finally financially independent.
C) Angela’s Path to Financial Freedom
“Your economic security does not lie in your job; it lies in your own power to produce – to think, to learn, to create, to adapt. That’s true financial independence. It’s not having wealth; it’s having the power to produce wealth.”
She can live comfortably without working and is secure financially. However, Angela’s passion lies in traveling and writing. She uses her income to travel and writes travel blogs to generate more revenue. With her travel blog, she now has enough money to live the life she wants, pursue her passions, and live the way she wants, thus achieving financial freedom.
II. The 5 Pillars of Financial Freedom
What did Angela do to achieve financial freedom? She used the 5 pillars.
Income Generation - getting a steady job as a teacher
Savings - building a safety net with part of her salary
Debt Management - paying off her student loans
Investing for Growth - investing part of her savings
Minimizing Expenses - living frugally and budgeting
These pillars are the building blocks we need to support our progress to financial freedom until we reach our goal, dream, or life’s desire. For Angela, it was to live her life traveling and doing what she loved.
For some, it may stop at having their own house, no debts, and enough money to cover their expenses comfortably. For others, it may be not working a 9-5 and spending time watching their kids grow and spending quality time with them.
What is financial freedom for you?
III. The 7 Levels of Financial Freedom
This brings us to the 7 levels of financial freedom. While the pillars are what you need to do to achieve financial freedom, the pillars are where you want to be. Like Grant Sabatier, it was selective work and focusing on his passions while for Angela it was doing what she loved and earning from it.
Goal Clarity: Understanding your current financial situation and goals. Angela knew how much she was earning, how much she owed, and what she wanted to do - pay off her loans, be stable, independent, and achieve financial freedom.
Self-Sufficiency: Living within your means and covering your basic needs. Angela lived minimally, only using money for her necessary expenses.
Breathing Space: Having some financial buffer after expenses. Angela prioritized savings to maintain a safety net with her savings.
Stability: Building a solid emergency fund and starting to invest. After setting aside money for emergencies, Angela used the rest to invest and earn passive income.
Flexibility: Having the ability to work less or pursue alternative income streams. The flexibility Angela got from her passive income gave her clarity to plan for the future and further increase her income.
Financial Independence: Passive income covers all your expenses. When Angela had two income streams to maintain her lifestyle, she quit her job, pursued her passions to create even more wealth, and lived her dream life.
Abundant Wealth: Having more wealth than you need, allowing for extravagant spending or significant philanthropic giving. Now Angela could achieve this stage by multiplying her wealth further from the three streams of revenue she had.
Angela’s travel blog was just the starting point. With enough followers, she could monetize it, take money from advertisements, be a brand influencer, write a book, or more. The options were endless. Each choice empowered her to climb the ladder of financial freedom to a life where she was controlling her choices, not the money.
D. Decyz POV on Financial Freedom Vs Independence
“Wealth is not about having a lot of money; it’s about having a lot of options. ”
What path will you choose to get your options?
At Decyz, we understand that money is a necessity to survive. But life is more than survival. It’s not about having enough money to eat, pay the bills, and have a roof over your head. Life is about having peace of mind and freeing yourself from the worry of the heart and mind.
While financial independence is reaching a specific destination like Angela did when she had passive income to maintain her lifestyle and have savings, financial freedom is a journey like Angela defining her own terms and sustaining through passion points.
So choose both, keeping financial freedom as the ultimate goal, no matter how difficult the path is - because it’s not about being free from 9-5, it's about being free to choose a life you love.
