What is Financial Independence?
Have you ever dreamed about never having to worry about money ever again? If so, you're not alone. Just about everyone wants to have a life where being stressed about being broke and not being able to pay their bills is a distant memory. But what exactly does that look like? Well, everyone's life situation is different but we're going to help you create a clear, concise mental picture of what that is for you personally and hopefully help you create a game plan for getting there.
Financial Independence: It's Personal
You see, most of us are at different stages of our lives. Some of us are single and some of us are in long term, devoted relationships. Some of us have several kids, some have only one, and some have none. Some of us are taking care of elderly parents and some of us have only ourselves to support. Some of us are young and some of us aren't. And don't get me started on the differences in income, debt, home ownership vs. renting, and other hot topics. With all of these different scenarios, how can I define something like Financial Independence for so many different people at so many different stages in their lives? It's actually pretty simple. Here it is:
Financial Independence is that point in your life where your passive income exceeds your living expenses on an ongoing basis. It's where you don't have to work if you don't want to and you don't have to worry about money anymore.
What do I mean by that? Let's look at a few different life scenarios to see if I can help you get a clear, concise mental picture of what that means for you.
What Financial Independence Isn't
Sometimes it's easier to define something by what it isn't rather than what it is. Here are a few different situations where you might think you're financially independent but you fall just a little bit short of that goal. That's not to say that you're not well off or that you're not living a pretty sweet life. It's just that by our definition, you're not quite there yet.
Scenario #1: I work a job where I'm able to save money each month and my savings are growing. Am I financially independent?
If you quit your job tomorrow, would you have to get another one to support yourself and/or your family? If the answer is yes, you're not financially independent.
Scenario #2: I live with my parents and work a part-time job just to have some spending money. I don't have to work if I really don't want to. Am I financially independent?
If something happened to them and you needed to move out, would you need to get a full-time job to support yourself? If the answer is yes, you're not financially independent.
Scenario #3: I'm on public assistance and get my rent, utilities, groceries, and medical expenses paid for. Am I financially independent?
Maybe. You have a roof over your head and food on the table. You may go on vacation from time to time. Your kids may be going to a good school. You may even have some money saved up. But, if the government changed the rules and cut your benefits, would you struggle financially? If the answer to this last question is yes, you're not financially independent.
Scenario #4: I'm retired, my house is paid off, and I don't have any debts. Am I financially independent?
Maybe. Are your savings growing month to month or are you spending down what you've been saving for years. If you live long enough, will there come a point where you run out of money and have to go back to work? If the answer is yes, you're not financially independent.
Living a Financially Independent Lifestyle
So, here's what living a financially independent lifestyle looks like.
I have a certain amount of money set aside that generates multiple streams of income (interest, dividends, business income, etc.) which grows each month. That income meets or exceeds my monthly expenses. I work a job part-time which I enjoy just to keep busy. I go on several vacations every year and I'm completely debt free.
Just imagine! You're at a point in your life where you don't even think about money on a daily basis anymore. If you want to go out to eat, you can without even looking at the prices on the menu. If you want to go on a trip, you can without even comparison shopping for air fares, hotels, or cruise tickets. Your monthly utility bills get automatically paid out of your accounts. Your kids go to whatever college they want without needing complicated financial aid forms filled out. You just write the check. Just imagine how stress free your life would be!
Okay, that sounds great but I'm not there yet. How do I get on track?
Great question! A lot of people get stuck on the answer to this one. The solution isn't complicated and doesn't require a college degree in finance to put into place. What it comes down to is knowing what to do and what not to do and then going out and getting the job done. What it does take is some hard work, perseverance, and a clear vision of where you want to go.
What we've done is take complicated financial terms and broken them down into simple, easy to understand concepts written in plain English. We've turned them into one simple picture you can write on the back of a napkin. It's called our Home Run Plan and it goes like this.
It's just as easy as playing baseball.
If you’re like most people, you probably know something about playing baseball. When you're playing baseball and you hit a home run, what do you need to do? You run the bases, right? Why? Because those are the rules. And if you don't want to play baseball by the rules, the coach is going to bench you. Well, life has rules just like baseball and if you don't play by life's rules, life will bench you too. But by running the 'bases of life', you'll hit a 'financial home run'.
By putting the 'financial bases' in place in the right order, you'll position yourself to achieve financial independence. The bases are sequential for a reason and build on each other to ensure that you'll have a stable foundation to support your life's goals and dreams.
For more on our Home Run Plan, check out this post: Getting Started on Your Money Journey
Financial Independence isn't just something you stumble into. It requires focus, patience, and the will to see the job through. But if you're willing to put in the work, the rewards can be amazing for you, your family, and for generations to come!
Thanks for reading!