Updated on 06.01.08

Financial Independence as a Goal

Trent Hamm

Whenever I read personal finance books and articles, I often see the term “financial independence” bandied about. To some, it merely means not relying on a parent or other loved one to help pay the bills. For others, it means freedom from all debt. For yet others, it means freedom from having to work for income.

These are all apt definitions of financial independence, perfectly applicable to different points in life and each useful as a goal for some people. Let’s take a look.

Freedom from financial reliance on loved ones
This is a freedom that many young people earn in their late teens to mid twenties, as they get through college, earn a degree, find a job, and separate themselves from their parents. For many people, this is financial independence. They strive to be their own person, independent of the people around them, capable of standing on their own two feet.

I achieved this goal at age twenty-three, after graduating college and moving on to a well-paying job. I partially achieved it at age eighteen after departing from college – other than holiday trips and one very long summer when an internship fell through, I didn’t live at home after that, I had steady work that provided income, and scholarships and loans took care of the college bill, though my parents did assist with little things fairly regularly during my college years.

Setting it as your goal If you can survive for a significant period of time (multiple months) without going rapidly into debt or without a steady cash infusion from your family, then you’ve achieved this goal. Generally, it requires a decent job, a commitment to keeping that job, and a desire to actually move on from a state of dependence.

Freedom from financial reliance on creditors
This freedom occurs when you are completely free of debt. No mortgage, no student loans, no car payments, no anything. Aside from taxes, you’re free to do what you want with all of your income. This is often used as the definition of financial independence by writers advocating a strong anti-debt position.

I haven’t achieved this goal as of yet. I am rapidly moving towards it, however. Since mid-2006, I’ve eliminated $17,000 in credit card debt, $6,000 worth of auto loans, and $19,000 worth of student loans, fueled by both personal frugality and earnings from The Simple Dollar. Currently, we have about $24,000 in student loan debt to tackle, then our mortgage (at about $170,000, all told). We’re attacking that debt as vigorously as we can, with large advance payments on the student loan debt going out every month. When we get down to just the mortgage, we’re going to start investing as a method to pay it off, as we believe we can earn more by investing our money than by making early payments against a rather low interest rate.

Setting it as your goal Setting this type of independence as your goal takes a strong commitment to the “spend less than you earn” philosophy. You need to be willing to directly put some of your income straight into large debt payments in order to get rid of that debt. This requires enough income to cover your basic expenses and more, a good grasp on how to control your spending, and a debt repayment plan that you’re committed to executing. If you’re willing to take on all of this, then you’re probably ready to take on this goal.

Freedom from financial reliance on employment
Many financially stable people view this as true financial independence: an end to the financial reliance on employment. It doesn’t mean you have to stop working, it just means that income from your work is no longer a requirement. It appears under many names: retirement and “walk away from it all” money are two of the most common ones.

I haven’t achieved this goal yet, either. My wife and I have a lifetime financial plan that involves debt freedom, building the house in the country that we’ve both dreamed of since we were young, and then heading towards this type of financial freedom (hmm… this plan alone might make for an interesting article).

Setting it as your goal Many of the same principles for debt reduction apply here. Spend less than you earn and invest the rest of it for the long term. Work on maximizing your income and minimizing your spending and sock away that difference. This means not only maximizing your career, but maximizing your frugality, too – know the real value of your time and do things with that time that produce value.

Financial independence is a great goal, but as with any goal, you have to define exactly what it means for you and then define a plan to meet that exact goal. Without that exact definition, you’re just whistling in the dark.

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  1. Tosin Matti says:

    Once again an excellent article.

  2. Frugal Dad says:

    The definition of financial independence seems to shift based on our life stage. As you put it, in high school/college the idea of independence means being free from parental support. Later, it means being totally free from required employment earnings. To be debt free, and free from the need for earnings from regular employment must be an exhilarating feeling. It is one that I aspire to, though I have a long journey to get there.

  3. clint says:

    Financial independence is a dream that can be achieved sooner rather than later. I have done a lot of research and found that anyone can get out of debt including your mortgage in 5-7 years. This is because of the way the debt ratios are set up. I have been using the role up method for about a two years now. We have everything but a little in student loans and we are curently working on our mortgage. We have been able to pay down over $7,000. on it in the last 7 months. we have more money now than we have ever had.
    a-debt-free-life is a good life.

    Great post it really got me thinking.

    Clint Lawton


  4. Matt says:

    I agree with the changing nature of what financial independence means depending on your stage in life. I think it also has something to do with what your personal goals are, I’m not free of debt but my goal would be to become financially independent by not having to work for money as a requirement. Each of the types of financial independence is more of a mindset than anything else.

  5. bleh bleh says:

    I have been working on the last of the three you have outlined right for about 6 months now. I am 35, and think this last stage could take anywhere from another 10 to 20 years. With that kind of time frame, I struggle with staying focused. I have attempted to try to define some good intermediate goals (i.e. where to be at 40, 45, 50, etc).

    The 10 year time frame is really accelerated, and will take a lot of hard work, and some luck. The 20 year time frame is much more doable, barring life change or disaster.

  6. claire says:

    Financial Independence for me is not having to work for the man, escape from the rat race, escape from the desk at “the corporation.” Escape from the 9 – 5, retire young, happy wild and free! Financial indepedence, early retirement, it can be done!

  7. Great post, Trent. Haven’t been here in a while but I have to admit, I am noticing a major change in your recent posts.

    I am not sure if it is because of the shift of income or the upcoming birthday but you remind me of myself when I was your age. Different situations, yes, but similar mindset.

    It is almost as if you are going from a frugal mindset to a strategic mindset.

    As for financial independence, it is a common word with multiple meanings depending on individuals. I, myself, no longer have any debt (only debt I have is less than 1K which will be paid off in three months), a growing net worth, and a slight improvement in passive income if not enough to be financially free.

    But I am not sure what it really means to me, it seems to me that it means being able to do what I want without the requirements of certain income stream. Example, full-time job requires 40 hours a week.

    Keep up the good work.

  8. justin says:

    Well said Claire!

  9. Jay says:

    While I’ve heard the first definition occasionally, the one I am most familiar with is the third one. I’m not there either, but I’ve come to realize it’s achievable. I have a friend who has been at it for about four years, and while he’s not there yet, he’s now earning passive income equal to what I’m making in my decently-paying software development job. Not that he relies on being passive.

    It is definitely a goal worth striving for. While there are better and worse ways to go about it, there are no reliable shortcuts. It’s all about nuking your consumer debt, living within your means, working hard, learning all you can, and building up your assets.

  10. T'pol says:

    I have reached the first stage when I was 21 and the second when I was 38. I will be turning 42 by Friday and all I can think of is reaching stage 3 by my 51st birthday. I may keep on working after that but hopefully on my terms only. It seems doable and I am living a pretty frugal life. If I had lived like this all my life, who knows but, may be I would be at stage 3 by now. Very good post.

  11. DB says:

    I finally had a “financial epiphany” of sorts three months ago, and subequently my wife and I launched **Operation Financial Freedom** – a full-frontal assault in all aspects of personal finance: spending, saving, earning, investing, and debt elimination. By working the margins, we’ve been able to drastically reduce spending, increase savings, earn additional income, increase retirement investments, and make great advances against our debt. We’re on our way – victory is assured!

    As for reaching a stage of independence from work, that won’t be an option for me until my mid-60s. Fortunately, I thoroughly enjoy my career choice.

  12. Jess says:

    This post really struck a chord with me. Namely because I am so proud to finally be standing on my own two feet at 23 (step 1) AND to be within 6 months of Step 2.

    Step 3 isn’t even a dream for me yet. I’m very happy to be doing what I do in life and I just can’t imagine a day where I don’t have a job to do. So when people start talking about “financial Freedom” I stop listening. Thanks for bringing it down to a level that I can grok :)

  13. almost there says:

    151 days till stage 3 at age 50, but who’s counting? :)

  14. Paul says:

    Some personal financial gurus suggest that once all debts other than a mortgage are paid off, you should aggressively pay off the mortgage as soon as possible. Shifting your extra money into investing makes more math sense, unless you are looking at moving and are concerned that the selling price of the house isn’t going to be very high or you are afraid your investments cannot substantially beat the mortgage loan rate of return.

  15. elizabeth says:

    @Paul – I think Trent has addressed the investing vs paying down your mortgage options before. It is different for different people. I know I will want to pay off my house because I will feel more secure that way. My husband would rather leverage the money, but he knows that if tragedy struck fully owning would be better.

  16. Jay says:

    My stepfather (who later became a financial planner, partly as a result of this bad experience) was adamantly AGAINST paying off your house early unless you could do it all with one lump sum.


    Things hit the fan with his previous career. During the gravy years, he’d paid extra on the premium. Then he found himself out of a job and starting a new career. And… after more bad luck… they found themselves in danger of foreclosure.

    His discovery? The bank will foreclose on the whole house, whether you owe $3 or $300,000 on it. And since the money paid on the premium is not liquid, there was nothing there to tap in an emergency. And since it was in danger of foreclosure, there was no getting a HELOC or anything. Basically, you are hosed.

    Fortunately, they worked out a deal with a friend of mine who was hunting for a house in the area. So the foreclosure never went through, though it was a black mark on their record when they went shopping for another house. They were able to walk away with some of their equity.

    So now I no longer make paying off the house my top priority, as nice as it would be to have the security of having it paid for – we’ve got a low interest rate on our mortgage, which I can easily exceed in investments (well, most of the time…).

  17. bleh bleh says:

    having a nice big fund in place for emergencies is a definite priority before paying off the house.

  18. Very good post. I really like the three steps. Currently, we are working on step #2. By the end of July we will have completed all of step #2 except for the mortgage.

    At the same time, I’m continually working on pursuing step #3. Developing sources of residual income can help to accelerate all of the Financial Freedom goals. Also, it can be the most exciting goal to pursue.

  19. Liko says:

    Jay and Bleh Bleh have the right idea. Saving a liquid emergency fund (3-6 months of expenses)before starting to pay off the house is a must! I was unemployed for 4 months once. I know what it’s like having to sell the property just to survive (my credit cards where pretty much maxed). That same property ended up doubling in price less than two years later.

  20. Perhaps we need to add a 4th step, in between steps #2 and #3. Financial freedom from creditors (other than mortgage) could be step #2. The new step #3 could be Financial freedom from mortgage, including the development of an emergency fund.

  21. Mark Nelson says:

    I think anyone can achieve financial independence. Financial independence has a different meaning for everyone. My definition is you are financially independent when your passive income is more than your expenses. If you can create enough passive income than you are financially free.

  22. Roger says:

    Ah, financial freedom. A wonderful goal for everyone to have. As of right now, here’s where I stand:

    #1) Semi-complete: Although I still live in my mother’s basement (insert Trekkie joke here), I am paying rent, and thus have one foot out the door (at least as far as being able to transition my expenses from my current living condition to living on my own.)

    #2) On hold (for now): My only outstanding debt is my student loan. However, as I refinanced it a few years ago and locked in a VERY low rate, I’m in no rush to pay it off; why worry about a loan at 3% when I could be earning 9% or so in a good stock fund AND watching the real value of my debt shrink as a result of inflation?

    On the other hand, as implied above, I don’t have a mortgage yet, and that will easily be another $100k-$200k debt to deal with, so even my optimistic assumptions have a time frame of a decade or more for complete debt freedom.

    2.5) I do have about 3 months of living expenses saved up currently, a reasonable amount (I think) for someone with no dependents, a solid career, and no expensive debt.

    3) Just getting started: My investments are rather meager, so far, but with my recent attempts to become more money conscious and start to save/invest, I should be able to get a good start on this soon.

  23. Lyno says:

    Hello all,
    Heres where I stand.
    1-I’m in my forties, close to reaching step 3.
    I was home with no income raising two great kids for more than 10 years. My husband provided all working in a factory – layed off 6 x during than 10 years period.
    First we cleared all debt, second we invested in REERs, third, we payed off our mortgage.
    Our investments are doing really bad nowadays…good thing I did not give in to my financial planner who was sooo pushy about us investing instead of paying our mortgage.
    I’m very proud to say we some money saved and live a very rewarding and peaceful life.
    We wish our children will follow in our footsteps.

  24. David says:

    Well stated, Trent.

    I don’t think it can be emphasized enough the need for an actual “plan”. I think the reason so many fail at this is that they rush into it, trying for major wholesale changes in their lives, and it just doesn’t seem to work that way most of the time.

    Very well put.

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