If one advances confidently in the direction of his dreams, and endeavors to live the life which he has imagined, he will meet with a success unexpected in common hours. — Henry David Thoreau
In the midst of our rush to earn money, our scramble to save for retirement, our focus on frugality, it’s easy to lose sight of why we’re doing this. What is the goal? What is it we’re trying to do by getting rich slowly? For me — and for many others — the answer is to achieve Financial Independence.
What is Financial Independence? Why is it a worthy goal? To me, Financial Independence means “getting out of the rat-race”.
Your Money or Your Life — still my favorite book on frugality and personal finance — defines Financial Independence as “having an income sufficient for your basic needs and comforts from [sources] other than paid employment”. Passive Income is money that you earn without having to work for it. When you earn interest on a savings account, you are earning money passively; it accrues whether you’re working or not.
Other possible sources of Passive Income include (but are not limited to):
- Rental property
- Stocks and bonds
- Business ownership
- Royalties (on inventions or creative works)
As with most money strategies, it’s best to diversify your sources of Passive Income. The more sources of Passive Income you can implement, the safer your money supply.
In some ways, Financial Independence is another way to look at Retirement. Retirement is a loaded concept. Most people think of Retirement as something that will occur far in the future, something that requires lots of work and lots of investing. Most books that focus on Financial Independence ask you to change your way of thinking. They don’t talk about Early Retirement, they talk about Financial Independence because it forces the reader to approach the subject from a new direction.
Some people who focus on Retirement are concerned only with increasing income and investments. People who focus on Financial Independence are just as likely to spend their energy looking for ways to reduce their current expenditures, to save money, to live cheaply. The lower your cost-of-living, the sooner you can achieve Financial Independence.
If I have monthly expenses of $3,000, then I need to earn $3,000 a month in Passive Income to support myself. But if I my monthly expenses are only $2,000, Financial Independence is that much closer. (Can you see how this is similar to the fundamental law of personal finance?)
Financial Independence may seem like a pie in the sky ideal. It’s not. This is your goal. This is what drives you. This is what you’re trying to achieve. Of course it seems like a crazy dream: it’s your final destination. But if you don’t fix this in your head as something you want to obtain, you’ll never achieve it. In order to become Financially Independent, you must make the decision to pursue it.