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Defining Financial Independence

   Posted On: September 11, 2013  |    Posted In: Personal Finance 101  |     Posted by: Broke Millennial®

The beginning of a series examining wealth.

Dunkaroos
This aisle would have been my second favorite to ice cream!

As a young girl, I have vivid memories of going grocery shopping with my mom. While we strolled through the aisles of Food Lion I would eyeball all the junk food I desperately wanted to toss in the cart. Dunkaroos, Oatmeal Creme Pies, Oreo cereal and ice cream would dance in front of my eyes as my mom steered us towards fruits and veggies. I remember thinking to myself, “When I grow up, I can eat all of this anytime I want! Even for breakfast!” Independence would taste so sweet. Well, I’m grown up and can indeed eat the occasional ice cream bar for breakfast, but I want a different kind of independence now. Financial independence.

In order to achieve financial independence, it’s important to first define what it means. It’s rare two people will have the same definition of financial independence. Some may point to paying off their debt, others will cite being able to save a certain amount of their paycheck with ease, perhaps a certain few mention no longer making withdraws from the Bank of Mom & Dad. To me, those are all steps on the journey to financial independence, because if you’re still relying on a paycheck can you truly call yourself independent?

The summer before I started college my fiscally responsible father handed me a book titled, “The Rules of Money: How to Make It and How to Hold on to It” by Richard Templar (affiliate link). Rule number two read: Decide on Your Definition of Wealth. Templar wrote, “…[my friend] would consider himself wealthy when he was living on the interest on the interest on his capital.” In that moment, during the summer of 2007, I decided my definition of wealth was intertwined with financial independence. Instead of assigning a number to what I decided would be wealthy, I hijacked the version from The Rules of Money. My definition for wealth: to be able to comfortably live off the interest on my capital. I wasn’t going to get greedy with interest on the interest! If I could sustain a comfortable lifestyle, living off my interest for the rest of my life, then I would consider myself having obtained financial independence. It would require a pretty impressive capital to achieve such a feat which probably meant some savvy investing.

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Two of my favorite (and first) personal finance books.

Perhaps it sounds like an unattainable goal to most, but I set the bar high because it motivates me to work hard and educate myself. Hard work alone will not achieve my goal, I need to be a savvy investor and most likely an entrepreneur. I also find my definition of wealth more useful than saying, “two million dollars sounds wealthy.” Sure, right now that sounds wealthy, but if I had two million handed to me right now, I wouldn’t be financially independent for the next sixty plus years. With some savvy investing I could make it stretch, but it wouldn’t be enough to sustain a family at the lifestyle level I hope to obtain. The frugality-focused personal finance writers are rolling their eyes right now.

It’s all about lifestyle choices. Minimalism to extreme levels isn’t appealing to me as a long-term financial solution. I would rather be able to take nice trips, buy the occasional luxury items, dress in non-thrift store merchandise, pay for 50% of my future-children’s college education and donate to organizations making meaningful changes in my community.

Living a frugal and materialistically-minimalist life now, more by necessity than by choice, is important to secure my financial future. However, I don’t intend to be Scrooge McDuck forever, except for the fact that he’s sitting on a massive fortune. And yes, I recognize that I’m citing a “tightwad” character as one who amassed a fortune. Forbes has even taken a crack at estimating Scrooge McDuck’s wealth for the Fictional 15 this year and it hovers somewhere around $65.4 billion. But why have $65.4 billion if you aren’t going to at least spend some of it on experiences, charitable giving and the occasional luxury item?

Before we digress too much, these thoughts are being saved for future posts in this series on wealth (where we can debate all those studies about wealth’s relationship, or lack of, to happiness). For now, share with me your definition of financial independence and wealth (in the financial sense).

[Dunkaroos image taken from Flickr]

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19 responses to “Defining Financial Independence

  1. I do not see wealth as an absolute value with regards to salary or portfolio value. Does someone that makes $150,000 annually wealthy? Does someone that has a $500,000 portfolio wealthy. Maybe, maybe not. I see wealthy as being able to do without earned income (I would have the choice to work or not work) and yet, be able to live the life I want and live comfortably on passive and portfolio income.

  2. Financial independence to me is being able to do what I want to do, and when I want to do it. I don’t have to work at a job that I hate just so that I can survive. It means OPTIONS.

  3. My definition is pretty long, so in the simplest terms it’s not worrying or stressing about money and being able to do exactly what I want (nothing crazy) without having to think about money. Or work because “I have to.”

  4. Great post, Erin. I think defining what financial independence is to you is one of the important steps a person takes on their journey to achieving it. And it’s the step most people skip. 🙂 I agree that too many people latch onto a number – one that may not have even been calculated with their goals in mind. Some people need $2M others needs less and some need more. I consider myself frugal in the sense that I don’t waste money on things that don’t matter to me but I also live a very good life and enjoy things that more minimalist people might not. And that’s okay. We all value different things and we need to figure out what we value and respect that others my value different things.

  5. I agree with Michelle. Options. Not having to do something every day. I love where I work. I might be content working until I’m 65. So financial independence doesn’t mean retirement. But it does mean being able to retire if I want.

  6. Okay, I’m just curious how you wouldn’t be able to make 2 million last a life time. 2% interest yearly would give you $40k a year and at 4% (the often cited safe withdrawl rate) you would have $80k a year. I don’t think anyone would call spending $80k yearly being frugal. Even $40k a year would go pretty far if you had no debt.

  7. Financial independence, on my opinion, is the level of net wealth that allows you to make any choice that you WANT to make, without money being an issue regarding this choice.

    However, this amount obviously differs for everyone depending on their desires in life.

  8. I would say my definition of financial independence is to not have to work another day in my life and be able to live off of the income from my assets. This is a bit hard to imagine right now as I am just trying to get rid of debt and slowly build up my 401k at this point, but I am moving in the right direction and that’s all I can ask for at this point.

  9. Your definition of financial independence is similar to mine. I view it as being able to cover all of my living expenses through investment income. This means that I wouldn’t have to work to cover my bills, but I would have to option to work as I see fit.
    It needs to be a reasonable standard of living where I don’t feel disadvantaged by living off of investment income, so travelling and spending money on entertainment are still important expenses to cover.

  10. Hi Erin! I found this blog through economag and am thrilled I did. Like you, I am a millenial trying to find my financial footing.

    Who knows how life will change my idea of this, but at 24 my definition for financial independence is having enough invested so that I would only be working because I truly wanted to. When I get to the point of having children, this would include having enough time to be the best dad I can possibly be. I’m also passionate about seeing the world and learning from others, so I would only consider myself financially independent when I can afford to take a slow-travel trip or two each year.

    Can’t wait to explore the rest of your blog! I’ll be checking back often.

  11. I’m sorry, but your first paragraph reminded me of a classic Seinfeld routine about loving adulthood because you can eat cookies whenever you want. Check it out: http://www.youtube.com/watch?v=gZWRPhdVFlY

    My definition of financial independence is simply the ability to make the lifestyle decisions you want without money being a factor. That will end up meaning very different things for different people, but in the end you simply need to be able to make the decisions that truly make you happy.

  12. Awesome post. I actually do put a number on what I consider wealth. And to me wealth does equal true financial independence, where I can spend what I need (and want) while living comfortably and not worrying.

    That number is 80k (I recently discussed this in the comment section of Cash Rebel’s Economag post too). If I earn that much money I’m probably part of the top 5%, although I don’t have the numbers in front of me.

    Sure it would be nice to be super-rich, there are indeed a lot of sports cars I want, but those can be saved for if I ever win the lotto.

  13. With a safe withdrawal rate of 4%, you’d be taking home $80,000 every year (adjusted for inflation) with $2M invested. With paid off vehicles/mortgages how is that amount of money considered paltry whatsoever?

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