What is Financial Independence, Anyway?

This piggy went to financial independence!

Financial independence is a phrase that gets tossed around a lot in the personal finance world. Many people aren’t entirely sure what it means. This is especially true because the definition of the term can vary.  This alone just adds to the confusion.

To help you understand what financial independence is and how it may relate to your goals, here is an overview of the topic.

What Is Financial Independence?

At the core of the financial independence movement is the idea of having enough money to provide you with the freedom to live life as you choose. This can include anything from eliminating all debt from your life to being able to make a career change without having to worry about the loss of income to being able to survive even if you don’t bring in another dime for the rest of your life.

Most people associate financial independence with the latter, meaning they strive to have enough funds available to prevent them from needing to pull in a traditional income for the remainder of their days. However, that doesn’t mean you have to personally subscribe to that definition. If a particular financial state gives you a sense of freedom, then it can also qualify.

How to Achieve Financial Independence

How you go about reaching financial independence is somewhat based on the definition that you hold to be true. However, certain concepts likely apply to all situations.

For example, eliminating all debt is usually a part of anyone’s plan to reach a state of financial independence. Simply not having these obligations affords many people a substantial amount of freedom. Especially in regards to how they manage their lives as usually only certain fixed expenses, like utilities and insurance, as well as living expenses need to be covered by any income they receive, regardless of the source.

Saving and Investments

Savings and investments also play a substantial role. These financial tools ensure that you have an appropriate level of long-term financial security. Even if you are debt-free, that doesn’t mean you can automatically quit your job without having something else lined up unless you have access to funds on various financial vehicles that can cover your remaining expenses.

Pay Off Your Debts

Essentially, you must plan to reach a point of financial independence by paying off your debts (and avoiding new ones). Try doing this while saving and investing properly to support your goals for the duration of your life. How much that requires depends on your unique situation, so there is no specific dollar amount that signals financial independence for everyone.

Assess Your Expenses

If you are aiming for financial independence, you need to assess all of your expenses including debts, fixed, and living. If you have debt, then starting off with a plan to pay it off is wise, as this frees you from a substantial burden. You also want to make sure you have a suitable amount of emergency savings.  This should cover at least three months of expenses.  Emergency savings help protect you from the unexpected while you work toward your goal. Finally, it becomes about saving and investing, creating reliable sources of cash for the remainder of your life.

Are you on the road the financial independence? If so, what steps did you take?

More from All Things Finance: