Updated: May 31
I often see the terms “financial independence” and “financial freedom” used interchangeably. However, I don’t quite see them as synonymous. Perhaps because of how my mother raised me, the notion of independence and freedom are related but not the same. And I make that same distinction when it comes to money and finance.
Let’s define these terms first.
Wikipedia defines financial independence as the status of having enough income to pay one’s living expenses for the rest of one's life without having to be employed or dependent on others. Income earned without having to work a job is commonly referred to as passive income.
Financial independence is also closely tied to the lifestyle movement of FIRE (financial independence, retire early). This model originated from the 1992 book best-selling book Your Money or Your Life written by Vicki Robin and Joe Dominguez (a book I still have and should probably re-read) and provides a basic template of combining a minimal lifestyle with income from investments to achieve financial independence.
That is to say, financial independence is achieved when the income generated by your investments is equal to your expenses. Your investments generate 5,000 a month and you spend that 5,000 in that same month – you’re financially independent.
Another school of thought categorizes financial independence depending on the level of assets you have aka the 4% rule. That is, once you’ve achieved 25x (4%) of your expenses as your nest egg, then you’re financially independent. If you spend 50,000 a year, then you are financially independent when your nest egg is 1,250,000 and you can withdraw 4% (adjusted for inflation) every year to cover your expenses.
I am definitely on board with the concept of financial independence. It’s one of the reasons why I am now so laser-focused on achieving financial independence (and thus, financial freedom) as soon as possible with massive passive income and leveraging my job (a work in progress, for sure).
So far, so good.
What is financial freedom then?
Kim Kiyosaki writes it best, “financial freedom is much more than just having money. It’s the freedom to be who you really do what you really want in life. It’s about following your passion, making choices that aren’t influenced by your bank account, and living life on your terms.” It also means not being enslaved to your financial commitments like your car payment, mortgage etc. that prevent one from living up to one’s true potential.
Being financially free doesn’t mean it’s just having loads of money. There are countless stories of people who’ve won millions in the lottery and then were broke three years after.
Now, why do I make a big deal in in separating these two terms when it can be argued that they essentially point to the same thing?
Because I think the word “independence” cuts even deeper for women, in particular. Independence means “freedom from being governed, freedom from the influence, control and determination of another or others.”
With this in mind, it wasn’t that long that women have had the right to use and spend their money. Cases in point:
1982: women were allowed to spend their money in English pubs without being refused service.
1976: Irish women are finally able to own their own homes outright.
1881: France grants women the right to own bank accounts; five years later, the right is extended to married women, who are allowed to open accounts without their husbands’ permission. The US does not follow suit until the 196os, and the UK lags until 1975.
1985: in Switzerland grants women equal rights in marriage (and by extension, allowed women to open bank accounts without their husband’s approval).
And yet, even from a Western perspective, the women’s financial independence is still not a given (certainly not yet in many third world countries). The financial knowledge gap between men and women is still wide, with women reporting uncertainty and less knowledgeable about financial topics (let alone personal finance).
So, for me, financial independence cuts deeper than just a formula to determine how to “stop working”. Financial independence also means being independent from one’s partner, parents and the government (don’t count on it to supply your pension when you retire); having one’s own investments, accounts and doing whatever you want with your own money. It’s about empowerment and self-determination to learn about personal finance to ensure that I can be independent in case the shit hits the fan (which it already has and paid for it dearly – I am now making up for lost time).
A man isn’t the path to financial independence and financial freedom. And don’t become his path to that, either. But financial independence can get you to financial freedom.
Instead, forge your own financial independence that gets you to financial freedom. Forego going to the traditional banks to ask for help on how to open an investment accounts and have them manage your investments.
There are lots of options online now, like Degiro, Yova, Selma and many more to get started on the path to financial independence (and that gets you financial freedom). Hey, I even have a short and free e-mail course on that very topic (just scroll down to sign up).
What about you? Do you make a distinction between financial independence and financial freedom? Is it all the same for you?
Let me know in the comments.
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