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What does financial independence actually mean?

Definitions

a state in which an individual or household has sufficient wealth to live on without having to depend on income from some form of employment

Wikipedia (source)

From Miriam Webster:

financial: relating to finance –

finances plural: money or other liquid resources of a government, business, group, or individual

independence: the quality or state of being independent

independent
1: not dependent: such as
a(1): not subject to control by others : SELF-GOVERNING
b(1): not requiring or relying on something else : not contingent
c(1): not requiring or relying on others (as for care or livelihood)
(2): being enough to free one from the necessity of working for a living

There are many opinions about the exact definition of FI (Financial Independence), so this is our take, and not necessarily the textbook version. The basic idea of financial independence centers around independence for us.

Our Take

Let me give a crack at this to give us a framework for discussion: Financial Independence means having your financial situation in order such that you can live on your own terms, independent of a paycheck; never having to work again.

The Mathematical Definitions

There are three main schools of thought on the mathematical definition of financial independence.

1. The live only on interest, leave an inheritance plan. Have a large enough amount saved that you can live only off the interest those investments throw off indefinitely without touching the principal in that account. The principal will outlive you and you will leave an inheritance to the next generation. This approach is largely based on the 4% rule (The Trinity Study).
2. The save as much as you need, then spend it plan. Have a large enough amount saved that you have enough money that you will never require a paycheck again. You can live off the interest, mostly, and draw down the principal in that account aiming for close to zero net worth at the end of your life.
3. The subsidize with some income plan. This involves a combination of interest from investments, having money coming in from some other source of “passive income” – possibly real estate,  maybe a blog like this, and/or a paycheck – but one that is created on your terms, maybe one that doesn’t involve 40 hours a week, and may involve something you love.

Hybrid Definitions

A countless array of hybrids exists. There are many subtleties and we’re starting to have names for the different flavors of FI as more as more people envision a hybrid approach. CoastFI, BaristaFI, LeanFI, FatFI, etc. The thing about independence is that people have the freedom to define and choose however they’d like to approach the topic.

What Does Financial Independence Mean to Us? (And Our Why FI?)

After a long-winded attempt at defining FI (something that by its nature defies definition), what I’m more interested in sharing is what financial independence means TO US.  And our WHY for FI.  Let me give that a shot.

For onFIREfamily, financial independence means:

Security

Financial security in ways no job can provide. Being free of a firing, a layoff, a stock market crash, or forced relocation. Never being worried about running out of money (now or when we’re old).  Security whether or not social security is around when we hit retirement age.

Freedom

Time Freedom: Freedom to spend our time as we see fit; not just with the leftovers of the 40-hour workweek. Time freedom also means not fitting our adventures into the bounds of two-week vacations. Freedom to linger. Freedom to adventure while you’re young and healthy, not when you magically hit 65 years old.

Location Freedom: Not having to be back in the office on Monday morning. Not having to live in a high cost-of-living area for a job. Not having to live near the office because it makes the commute reasonable. Being able to live, and travel, and experience wherever and whenever you choose.

Spending Freedom: The ability to spend money where your heart lies – charities, mission work, vacations, home improvement, hobbies, etc.

Flexibility: Flexibility equals Freedom. Flexibility to change and react to new opportunities. This could be within the time/location/spending realm or other areas of life. Freedom to pursue things that make no sense in the context of a traditional job/income. Passion projects, service projects, volunteering, etc. FI gives you the freedom to say FU to the job or working conditions that are not in alignment with your values or your goals. Freedom to live life on your terms within your values.

Life Altering

FI means living the life our parents and grandparents never had. Achieving something they longed for. Time to work on projects, trips never taken, fixed incomes late in life too restrictive to enjoy, declining health impacting life-long yearnings for the experiences never had.

Passive Income That’s Really Passive

FI, to us, means being your own boss. They say that even “working for yourself” or being a small business owner is like having a boss. Working for yourself means you’re working for the toughest boss you’ve ever had. Being a business owner means your customers are your boss. Shareholders are your boss. The renters in your rental real estate are your boss. For us, FI means being free of bosses, even if that boss is yourself. To us, FI means passive income that’s actually passive, meaning minimal effort to produce income.

Enabling

FI is enabling. It’s step #1 toward FIRE.  You can’t do the RE part without first achieving the FI part (if not completely, then at least partially). You can retire at a more normal age (65? 72? Or whatever the government deems appropriate), but to do the whole Retire EARLY thing, it must be enabled by financial independence.

Choices

But just because it enables retiring early, it also doesn’t mean that you have to retire early. FI gives you the choice.  For us FI doesn’t mean never working again. We may, if we choose, but it’s the freedom in that choice that we’re after.

Conclusion

Financial Independence is defined as having your financial situation in order such that you can live on your own terms, independent of a paycheck

It really doesn’t matter if we split hairs and talk about whether that means living only on the interest of your investments, spending down your savings, having passive income, or even working a job (on your terms) that generates income. Or some hybrid of these.

For us, FI means:

• Security
• Freedom
• Life Altering
• Passive income that’s passive
• Enabling
• Choices

What does FI mean to you?