Financial Independence Meaning Sets You Free to Choose Your Destiny
What is the meaning of financial independence?
“Financial independence is the ability to live from the income of your own personal resources.”
Do you have money to cover your living expenses, for example, rent food, transportation, etc, and still have enough left in your savings to manage this for at least 2 years? Then you’re financially independent!
Are you rich? Not necessarily. Can you live on the money you have without a job or ask anyone for assistance to manage your expenses? Yes.
Financial Independence Meaning
The meaning of financial independence is having enough money to pay for your current lifestyle without a regular job or asking anyone (parents, spouse, friends) for assistance.
Whether this level of financial independence is what you seek or you are aiming for more, for example, having enough money to retire comfortably or taking time off work for two years to travel the world, is where it differs for everyone.
In this article, we’re going to explore the meaning of financial independence from your perspective and what achieving financial independence means for you. Let’s dive in!
A. Your Financial Independence Meaning
“Financial independence is about having more choices.”
Mia grew up in a house where there were regular fights over money. Her father could not hold a regular job and her mother worked odd jobs to pay for food and rent while managing the house and kids.
Mia dreamt of a life where she did not have to ask her parents for money and the stability of having a house to live in where she would not be kicked out at a moment’s notice because the rent was not paid.
Mia’s benefit of financial independence was earning and saving enough to buy a house of her own and never asking anyone for money.
Then there’s Jack who saw his father give 20 years to a warehousing company as the manager and lose it all one day when the company went bankrupt due to some poor decisions by the board. Close to his father’s retirement age, all his parents were left with a house because the mortgage was paid off.
Jack never had to worry about food and shelter while growing up like Mia but dreamt of a life where he did not have to work a 9-5 for 20 years and have nothing left when he was old. This was his meaning of financial independence.
Financial Independence Meaning For You
Both Jack and Mia were driven by different experiences and desires but their goal was common - having enough money to live their life without being dictated by the constraints of regular paychecks and limited finances.
Similarly, we all have our version of the meaning of financial independence.
Our meaning of financial independence can change as we achieve financial security, for example, Mia getting her first job and moving out of her parent’s place. Maybe she now wants more than her needs of shelter and food being met. Rather than working 30 years to get her own house, she wants it in 15 years.
Let's go a little deeper about the needs and wants that drive our desire for financial independence, and how our financial independence meaning can change as we climb the ladder of financial independence.
B. Stages of Financial Independence
Have you heard about Abraham Maslow’s Pyramid of Hierarchy of Needs? It explains the motivation behind our needs, and how we fulfill our basic needs for survival like food and water before moving on to shelter and social needs like love and friendship. It’s only after that we seek financial security.
Financial independence works the same way. Each level represents a step that takes us closer to our goal of having enough income to cover our expenses without relying solely on a job.
Your starting point, for example, personal circumstances and financial health when you begin your journey to financial independence play a pivotal role in how and when you achieve your goals.
Let’s explore the meaning of financial independence at each level to understand the steps that define your path to living a life free of financial worries:
4 Stages To Financial Independence
Level 1: Survival
This is the most basic level of financial independence, the bottom rung of the ladder when our journey to financial independence begins. Here, your income barely covers your essential expenses: food, shelter, utilities, and basic clothing. There's not much room for savings or paying off debt.
For Mia, the meaning of financial independence at this level was achieving financial independence from her parents. She had enough saved up from doing odd jobs after school and during summer vacations. As soon as she turned eighteen, she:
Opened a savings account and deposited her savings
Searched for a room with minimal rent
Once Mia moved out, she focused on increasing her income as she was now paying for rent, food, and utilities. She increased her hours at her waitressing job until she could comfortably cover her rent and food.
The meaning of financial independence for Jack at the first level was different. He had a head start on Mia.
Jack had a college degree but had to pay off his student loans. He also wanted to begin earning enough to help his parents out as his father did not have a job. Jack got a starting job as a finance analyst, still living with his parents to support them and save on rent. His salary was enough to cover the basics and help his parents but saving was a stretch with student loans.
Level 2: Stability
On this rung, you're starting to climb out of just meeting basic needs. Your income covers your essentials and allows you to start building a safety net. The aim at this level should be to start paying off debts and building your savings to have financial stability.
Financial independence meaning for Mia and Jack at this level was to increase income to cover their expenses comfortably, begin building a safety net, and pay off loans in Jack’s case.
Mia was working 40-hour weeks as a waitress, and saving every dollar from her wages and tips in her savings account. However, the progress was slow and it was draining her energy and motivation.
With no college education or professional skills, her options were limited. However, years of odd jobs and waitressing had given her one skill - Mia was excellent at reading people and anticipating their needs.
Then Mia approached the owner who came in every Saturday, impressing him with her suggestions. This landed her the role of assistant manager and lead hostess.
She eventually worked her way up to the manager, allowing her to build her savings and move to a studio apartment with no roommate.
Jack was also struggling to build a safety net because of student loans and daily expenses. But he had his evenings and weekends free. Jack wanted to utilize this time to increase his income.
Being a whiz at math, he began looking for online jobs as a math tutor. He soon found a steady stream of students and also extended his classes to beginner investors who wanted to learn finance. This allowed him to:
Cover daily expenses comfortably
Begin aggressively paying off his student loans faster
Build a safety net with savings
Level 3: Flexibility
At this stage, you've covered essential expenses, built a safety net, and have some room for savings and debt repayment. You’re now comfortable and have some breathing room to think about the future. There are more options and choices to pursue your original goal of financial independence which was to have her own house for Mia and retire early for Jack.
The key is to increase your income, both with a better paycheck and investments to generate passive income and achieve financial independence.
At this level, the meaning of financial independence for Mia and Jack was creating flexibility to reach their goals faster, while opening up more possibilities for a financially secure future.
Mia’s options at this stage include:
Going beyond the savings account and exploring passive income (high-yield savings accounts, stocks, mutual funds) options with her savings
Aim for a higher-paying job in the restaurant industry because she now has experience and has built a reputation
Keep increasing her savings by increasing her income
Jack’s options at this stage include:
Aggressively pay off his loans and increase his savings
Extend his online presence as a math and finance tutor and increase his income
Explore employee benefit plans like IRAs(retirement savings accounts), along with passive income generation in stocks, mutual funds, and REITs (Real Estate Investment Trusts)
With a steady income and significant savings, you open possibilities beyond the traditional job and the survival of opening on a fixed paycheck to maintain your lifestyle.
Level 4: Security
At this level, the meaning of financial independence is the choice of increasing income and the time spent working a regular job.
You don’t only have the choice of how to increase your income but also the choice of how much time you spend working.
You've accumulated enough savings and passive income to cover your essential expenses, even if you work fewer hours or take a break from your job.
Mia invests in a Real Estate Investment Trust (REIT) focused on restaurants. REITs are like owning a piece of an apartment building or restaurant. Instead of managing tenants yourself, you collect rent through dividends whenever the building makes money.
This generates passive income that supplements her salary, allowing her to profit from her savings to be financially independent. This is the point where you become financially independent.
Mia now has the choice of leaving her job for two years if she wishes, living off the passive income she’s generating from her investments. However, for a permanent leave, Mia must increase her passive income with more investments.
Jack continues to invest in a diversified portfolio of stocks and mutual funds, reinvesting his profits to build enough wealth to leave his job if he wishes. When he quits his job, he will also benefit from his employee benefit plan, getting more money to invest, and multiplying his wealth to fast track early retirement.
Alternatively, without a full-time job, he can grow his side hustle, getting into financial blogs or classes to keep earning on the side on his own hours and time, achieving financial independence.
C. Financial Independence To Financial Freedom
While financial independence gives you the freedom to work only when you choose and still maintain your lifestyle, financial freedom gives you the power of choice to live the life you desire.
At the last level, the meaning of financial independence is paving the path for financial freedom.
It opens possibilities and avenues you can only dream of. Mia now has another dream - opening her restaurant. Financial independence opened the way for both, fulfilling her dream of having a house and a restaurant.
Jack can retire early by multiplying his wealth and work when and if he wants to, doing what he wants without any risk of losing a job like his father.
D. Decyz POV On Meaning Of Financial Independence
“So while I’m not yet rich, I am wealthy. I now have income generated from assets each month that fully cover my monthly expenses.
If I want to increase my expenses, I first must increase my cash flow to maintain this level of wealth. Also, note that it is at this point that I’m no longer dependent on my wages.
I have focused on, and been successful in, building an asset column that has made me financially independent. If I quit my job today, I would be able to cover my monthly expenses with the cash flow from my assets.”
At Decyz, the above explanation sums up the meaning of financial independence perfectly. This is what we all should be aiming for, getting a point where we can cover our monthly expenses without a job and with income generation from our assets. How much further we want to go from here depends on how we grow our wealth to match our expenses and move from financial independence to freedom.
