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What Is Financial Independence

I was reading some interesting points today when it comes to the notion of achieving financial independence as apparently a lot of people associate that phrase with simply how much you make. For example, if you make a million dollars a year then you have achieved financial independence. There was a point though saying how someone could make like two thousand dollars a year where they could be a person who achieved financial independence as it is based mainly on the notion if a person generates more income than their expenses.

That does make sense in many ways as a person who makes a million dollars a year could pretty much be in the same situation as a person who makes less due to spending habits. For example, a person that insists in buying a house worth ten million dollars and insisting in dining in the most expensive places each day. It should kind of make you think where if you are always so caught up about having to make more money maybe it’s more about reducing expenses as much as possible.

It must be weird to think like that based on what we are used to though. Example, instead of worrying that you must find a way to make like say one thousand a month to buy food it should be more about how can you reduce that expense to as little as possible even if it means growing your own food. Basically, financial independence is more about having no outstanding expenses at the end of the day as opposed to how much you make. Sounds more logical to me personally.

Comments to What Is Financial Independence

  • My understanding is that financial independence means being able to cover your living expenses without working. Generating more income than expenses could mean as little as living just slightly above paycheck to paycheck. Financial independence means having wealth in the form of income producing assets that meet all of your needs without requiring any effort on your part. It also means showing up for work only when you feel like it.

    We also use a flawed metric in characterizing wealth. My take is that wealth should be measured in units of time, not currency. Take your net worth and divide by your annual living expenses– that number of years is how long you can survive with no income. It’s not the size of your nest egg but how long it would last you. So, yes, reducing expenses is a great way to increase your wealth– more savings adds to the numerator and less spending means a smaller denominator.

    This method is not for everyone (especially those who are status conscious because, let’s face it, status is really expensive), but if you care more about being able to choose how you spend your time and are willing to ignore the Joneses, then I think it’s worthwhile.

    freebird 6/23/2013 9:52 am
  • I guess the tricky thing for me to say that financial independence means not working is that I personally can’t imagine a situation where one simply never works. Example, even if we were all living in a cave with free fruit trees and other items around us we still need to work to get it such as acquiring the item or making sure the plant is okay. However, in that case I would consider that financial independence.

    To some extent you can say that about a wealthy investor too as they still need to monitor their investments. Maybe not with as much energy as say the CEO who is running the actual business of course. So I suppose it is along the points you mentioned of time.

    Alan Yu 6/23/2013 10:20 pm

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