“Financial independence” is a term that I often use on The Simple Dollar to describe my primary long-term goal when it comes to my finances. The catch with a phrase like “financial independence” is that it can have such drastically different meanings to different people.
For example, some people consider themselves financially independent if they’re able to cover all their monthly bills. Others don’t consider themselves financially independent unless they can obtain every possible material desire they might have for the rest of their lives using what they’ve saved.
My standard for financial independence (as with most people) is somewhere between the two. I define someone as financially independent if they meet these five tenets.
You are free from debt and don’t expect to face in any in the future.
You don’t owe any money at all to any lenders. You might have a credit card balance, but you pay it off in full at the end of the month. Even more, you’re not going to need to take out any debt to manage your life. You can handle car purchases and any home purchases completely out of pocket.
This is key for financial independence because it minimizes your monthly bills today and tomorrow. Your month-to-month payments are incredibly low, giving you much more flexibility in terms of income level, savings level, and lifestyle choice.
You spend significantly less than you earn.
Even though you’re debt free and your monthly bills are quite low on the whole, you still spend a lot less than you earn. Your net worth goes up each year not just because you have money in the bank that’s growing, but because you contribute to that total amount.
By earning far more than you spend, you exhibit self-control while also showing your ability to prepare for whatever the future may hold.
You don’t rely on family members or friends for income, earning it only through your work.
You don’t receive checks in the mail from family members helping you out. If you do receive them occasionally, they are not needed to maintain any level of your current financial state.
Your income comes solely from your hard work and from your investments. You’ve been able to achieve this on your own, and thus you know it can be done.
If you were to lose your primary employment, your family would survive for an extended period of time without significant lifestyle change.
The “extended period of time” has some flexibility to it, but I would consider a year to be an absolute minimum and I would look at several years as being much more reasonable when talking about financial independence. It’s simply a matter of having saved enough money so that your primary income stream can disappear without causing your life to enter any sort of panic mode.
In other words, the debt freedom and career choices you’ve made are secure thanks to your repeated wise decisions regarding your income. You’ve socked much of it away and now you have incredible flexibility.
You have a skill set that you can immediately apply in a variety of fields.
If you were to lose your current job, you have skills that would enable you to quickly move to another career path. Not only do you have transferable skills, such as information management, time management, and communications skills, you also have some technical skills that can be plied paired with a strong work ethic.
You don’t necessarily have to be actively employed, but if you chose to be, you could find work because of the skills you have and the resume you’ve built up. You have solid knowledge of how multiple fields work and you know what to do if you needed to earn money.
To me, these five traits are a sign of true financial independence. If you’ve achieved all of these things, you’re in a very secure place, and if you maintain them, the life you have will remain secure.