Financial Independence: The Final Stage of Money Management

This is the last of a five-part series about the “stages” of personal finance. These stories have intentionally been less polished than most articles at Get Rich Slowly. This is a chance for me to think out loud, to explore an idea with you in an informal way.

In February, I wrote that I was entering the third stage of personal finance. As I made my way out of debt and began to save, I had noticed that many people passed through similar phases of financial development. We took similar steps along the way. In my own journey, the progress looked like this:

  • Initially, I was fumbling in the dark, spending compulsively and accumulating debt.
  • Eventually I saw the light and began to repay my debt.
  • After a hard slog, I reached the light at the end of the tunnel: my debt was gone and I began to save.
  • Now I've entered new territory. I have a plan, and I'm sticking to it as I reach for my eventual destination: Financial Independence.

Financial Independence is my ultimate goal. It's the state in which I will no longer have to worry about money. I would have enough saved so that I could do whatever I pleased. But what exactly does this mean?

Defining Financial Independence
One of the underlying philosophies of this site is that different things work for different people. We each have different goals, different strengths, and different weaknesses. Though Financial Independence is the goal for many Get Rich Slowly readers, we each mean something different by it.

In Yes, You Can…Achieve Financial Independence [my review], James Stowers states: “No person is free, in an economic sense, who does not have adequate investment income entirely unrelated to work.” In other words, Financial Independence means that you earn enough from non-work income to fund your current lifestyle. I think this is the traditional definition of the term.

But the classic Your Money or Your Life offers a little more nuance:

When you are financially independent, the way money functions in your life is determined by you, not by your circumstances. In this way money isn't something that happens to you, it's something you include in your life in a purposeful way…Financial Independence is being free of the fog, fear, and fanaticism so many of us feel about money.

If this sounds like peace of mind, it is. Financial bliss. And if this sounds as unattainable as being rich, it isn't.

[…]

Financial Independence has nothing to do with rich. Financial Independence is the experience of having enough — and then some…The old notion of Financial Independence as being rich forever is not achievable. Enough is. Enough for you may be different from enough for your neighbor — but it will be a figure that is real for you and within your reach.

Another view of Financial Independence is presented by George Kinder in The Seven Stages of Money Maturity. Kinder argues that when you understand what you want to do with your life, you can make financial choices that reflect your values. In his view, the final two stages of money management are what he calls Vision and Aloha. (Note that Kinder's approach contains a spiritual element. He uses language in his definitions that some may find odd.)

With Vision we understand further that money is a conduit through which our souls flow into the world. We have produced as much as we personally need. We discover within us a capacity to reach out farther than we have ever imagined toward meeting the needs of our families and communities. We find no obstacle between what we want to accomplish and what we do.

[…]

Aloha conveys kindness, generosity, at-one-ness, and compassion…We give without expectation of return, understanding that living is giving. We know both the limitations and the power of money, yet money no longer agitates us. We rest calm before it. In that calmness we can serve one another from the natural generosity that lies within and waits to be offered tot he world.

In some ways, Financial Independence is just another term for retirement. Think about it. Most people retire at 60 or 65 because that's when they have enough saved to last the rest of their lives. If they don't have enough saved, they continue working. If they manage to save the money earlier, then they retire earlier. When you retire, you're essentially declaring that you are financially independent.

Moving forward
What will Financial Independence, the fourth stage of money management, mean to me? Will it be a purely monetary state in which I have enough investment income to do whatever I like? Will it be the point at which I have “enough”? Or will it be something deeper, more spiritual, as suggested by George Kinder?

I don't know. In fact, I don't know if I'll ever actually reach this goal. But I intend to stick to the path, working my way through this third stage of personal finance, hoping one day to reach that destination.

Your turn: What does Financial Independence mean to you? If you were financially independent, what would you do? How would it change your life? Is this one of your goals? Why? If not, why not?

More about...Planning, Retirement

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Baker @ ManVsDebt
Baker @ ManVsDebt
11 years ago

J.D., I’ve been a subscriber for a while now, but have never enjoyed a series quite as much as this one. I know you intentionally claim that these are less “polished”, however I am very impressed by the feel and style. I look forward to the rest of your journey towards this last stage. I have a feeling the closer you get the more you will begin to favor a lot of Kinder’s observations. Whether you eventually make it or not, I implore you to continue to write series in this voice. For me at least, it’s connected more than… Read more »

Jorge
Jorge
11 years ago

J.D., I’m really enjoying this series of posts and love the nuanced definitions of Financial Independence you presented. It can mean so many different things to different people, depending on what their goals are.

I’m ending stage two and entering stage three myself, where I’ve seen then light and have paid off my debts (except for the mortgage) and am in the process of laying out a plan to get me to Financial Independence.

Good luck to everyone in reaching their goals of Financial Independence (before age 65). Reading blogs like this is a great step in getting there!

ABCs of Investing
ABCs of Investing
11 years ago

For me “FI” is having a large enough portfolio to pay for basic living costs.

James M
James M
11 years ago

I’m in a good situation, but not one that makes me happy. I have a nice salary in a field that doesn’t excite me, so my plan for financial independence puts me “retiring” early from this job and into a job that I’ve always wanted to do (I have 2 picked out, I want to start a brewery, or start a landscape design company). If the new job takes off, great, if not, I’ll do it until something else makes me happy. That’s what it is about to me… I can’t believe what I’m about to say, but Bob K.… Read more »

Shanel Yang
Shanel Yang
11 years ago

Financial independence means only thing to me: Never having to work again. Or, more specifically, never having to do any work that I don’t enjoy again. It’s definitely one of my goals and I’m working hard every day on developing my writing skills to become a bestselling author and successful screenwriter to accomplish this goal. I love writing so much that I’ll still do it when I’m FI, but I won’t focus at all on what I think people will want to read or watch at that point. Great series, J.D.!

Roger - A Content Life
Roger - A Content Life
11 years ago

“Financial Independence is the experience of having enough – and then some”

I agree 100%. So one question you can ask yourself is how can you make “enough” smaller? You may be happier with a lot less than you think.

Tyler Karaszewski
Tyler Karaszewski
11 years ago

I’m still not a fan of this concept, like I’ve mentioned before. Part of the reason was presented in your article — you gave three different definitions for it. If you can give a word any meaning you want, that means that it has no inherent meaning of it’s own. The term “Financial Independence”, on its own and unqualified, means very little. Even if you take one of the seemingly common definitions, which is essentially “I have enough invested so I can live off the interest”, you’re not independent, you’ve become a slave to the stock market (or wherever you’ve… Read more »

Benjamin
Benjamin
11 years ago

Financial Independnce to Me…

It is definately more than just being able to “buy whatever we want”. I think of financial independence” in more of a spiritual sense.

I currently spend a great deal of time away from home for my job. Although I love my job, I only do it because I need to support my family and myself.

Being in a financial position so that I work because I wanted to and not because I “had” to would be my definintion of financial indepenence.

KS
KS
11 years ago

I love Tyler’s perspective on this. I’m the first to admit that I can’t stand Your Money or Your Life, and one reason was because I couldn’t get a handle on working, scrimping, saving for something as vague as their notion of Financial Independence, which seemed as dependent on bond rates and the price of various goods and services (i.e., externalities) as anything else. For me, I love my career, it aligns with my values and talents and sensibilities, and one I want and can pursue for a long time. For me, FI means being able to continue to live… Read more »

Louise
Louise
11 years ago

We reached financial independence in our 40s. What surprised me most about this stage is that we found we actually need much, much less that we did when we were working. So many of the things we paid for were “rewards” for working. Just maintaining our lifestyle in a busy urban area where the jobs were was expensive. Now that we can do what we want, what we want costs very little money. Because of this, when our portfolio took a big hit last year, we didn’t stress out. We now have a much better idea of just how little… Read more »

The Arabic Student
The Arabic Student
11 years ago

I’m lucky that I went through the 1st stage of money management when I was in my early teens. I’m 22 now. The thing is, I’ve always hated work so much that I wanted to be able to stop doing it as soon as possible (being lazy is a good thing when it comes to personal finance… to a certain extent). This pushed me to save a huge percent of all the money I’ve ever gotten. I have a 2006 Mazda 6 paid off, $65,000 left on my mortgage, and $13,000 in savings right now. I make $45,000 a year… Read more »

ABCs of Investing
ABCs of Investing
11 years ago

Tyler – part of being “financially independent” (regardless of the definition) is to know enough about your finances to keep yourself in that financially independent state.

If you are about to retire and have all your investments in equities then you are taking on a huge risk which can work against you in a big way.

One “rule of thumb” is to have 5 years worth of expenses available during retirement so that you can get through a bad patch in the equity markets.

Wesley
Wesley
11 years ago

I’m really enjoying this series of articles. I’ve been debt-free for a while now (thanks in no small part to this site!), and I’m really not sure what to shoot for next. I’m guessing financial crossover would be the next logical goal, but getting there seems unexciting.

I’ve been in the same field for a decade, and while I can keep going for a while longer, I continue to wonder what I want to do “when I grow up” 🙂

Thanks for these posts JD. I enjoy both the style and content.

Michele
Michele
11 years ago

I’ve never been in debt and was brought up learning how to manage my money, and actually majored in finance in college so I was in step 3 immediately upon earning an income. Now, 20 years later I feel I have a good start to financial independence, having saved a great deal – I can weather many storms that others cannot. To me it is a feeling of freedom – being able to finance your needs with what you have. In retirement, I hope to be able to do what I want – vacations, a home in a warm climate,… Read more »

goldsmith
goldsmith
11 years ago

I agree with KS – I, too, have a career that I enjoy so much that I would keep my job even if I had a windfall large enough to live on investment income. Besides, it has retirement and disability pension entitlements that would let me carry on even if I became unable of working tomorrow. I would nevertheless like to take a sabbatical some years from now to travel the world, and I do not have that money saved up yet. So my last stepping stone to FI (I would go with the definition from YMOYL), is the “sabbatical/travel… Read more »

Finally Frugal
Finally Frugal
11 years ago

Your Money or Your Life is the book that motivated me to stop spending way above my means (using credit) and begin tracking what I spend and also what I really need to be happy. I, personally, love the concept of ‘enough’. How much do I need to spend to get to ‘enough’. How much do I need to earn to get to ‘enough’. How much is enough for me? It’s going to be different for each person, as these comments illustrate. For me, FI means being debt free, being able to work part time (or not at all), and… Read more »

Kenny
Kenny
11 years ago

Financial Independence and Retirement are TOTALLY two different aspects for most people. Here is why: 1. Financial Independence is a goal that most people have in their 20’s and 30’s. It is a dream that most have that they will do this and that. It is not easy to achieve this goal, but a few do make it to this stage. The millionaire books will tell you that if you ‘own your own business’ and ‘run it with passion’, you have a very high likelihood of achieving it. 2. Retirement is something that people generally seek at at 60 to… Read more »

debtheaven
debtheaven
11 years ago

So many interesting responses! You know, JD, you’ve been working towards this for longer than you realize. To some extent, you were already “financially independent” enough (whatever that means) to leave the box company and pursue your dream. Until I read this entry, I didn’t consider us “financially independent” either, because in the strict sense of the term, we’re not. But like you were when you left that box company, we were “financially independent” enough for me to leave a job with decreasing satisfaction, and a new 3-3.5 hour commute (my company moved in July 2008, I left in Jan… Read more »

Kenny
Kenny
11 years ago

Thanks Debthaven for your comment…..All of this just comes with financial independence and going for what the family wishes. We doubled the price of the home we sold, but our previous home was paid off, and the new home was purchased without selling the previous home. ALL of your decision making process, and the methodologies that people ‘commonly use’ goes out the window when you have saved for a goal, BEFORE you go an achieve the goal. It goes along the same line that I teach my kids…..Have the cash in your pocket to buy your ‘need’, and then charge… Read more »

debtheaven
debtheaven
11 years ago

UGH, I lost my long comment and response to Kenny! Kenny, I’m sorry. Long story short you can raise two or three or four kids with very different values! You can “teach” till you’re blue in the face, but you can’t “make them learn”! That has been our experience. DS1 is in grad school and saves every penny, had done charity work on three continents in three years. DS2 is in business school and burns money like nobody I have ever met before or since. Since they were in HS, they’d get cash gifts from their rich grandparents / dad.… Read more »

debtheaven
debtheaven
11 years ago

I’m sorry, I’m being really verbose. DS2 (10) came home down from school the other day. They were looking at old photos and other kids realized he had the same winter coat he had two years ago. They teased him. It broke my heart for him. I told him to ask all those kids with their new winter coats who teased him, how many of them flew to Florida two summers ago to swim with dolphins? Obviously I’m not expecting my 10YO son to do that, but this is exactly the type of carp I’m talking about. When he told… Read more »

Janette
Janette
11 years ago

Financial independence moves with your age-IMHO. We are very comfortable right now. We will be working at an 8-5 job for two more years to sure things up- and then off we go(at 54 and 60). Both of us have taken substantual breaks during our lives (several years at a time for various reasons). The idea of financial independence is knowing that you have enough to enjoy what you want in life. Fortunately, what we enjoy is family, woodworking and volunteering. Already did the big travel, but there is no reason we cannot save our “allowance” and travel when we… Read more »

Kenny
Kenny
11 years ago

Oh, yes…..I am talking about the job I am doing. I am not sure if my younger one is going to heed 100% of the advice. Hence I am trying to give 200% examples, thinking, that a sum total of 80% of that will rub off. Both my kids are very different. The older one will follow it to the T, but the younger will make more money and spend more. BUT….. They both realize that when they get 2x to 3x that they have asked for, after waiting for a deep discount sale, and still we have saved 50%… Read more »

Liz F
Liz F
11 years ago

I think there are few things in life more discouraging than spending years at the same low-level job (in my case, 13 years), while your friends are pursuing *careers,* that they enjoy at least to some extent. I have a bachelor’s degree in English, but my job has nothing to do with it. I have been a compulsive spender for my entire life. I knew enough from my dad not to accumulate debt, but I spent every single penny of every paycheck on “stuff,” to make me feel better. And most of the “stuff” was going towards fleeting hobbies to… Read more »

Edric C
Edric C
11 years ago

J.D., this has been an inspiring series for me. I’m still young but your blog has continually challenged my beliefs. People around me are spending their money recklessly (or without direction) and are often at the brink of financial collapse. When I talk to them about money and investments, they shrug it off and tell me I’m thinking too hard about the future. They also tell me they will seek education when they’re ready. That’s how I approached money a year ago. What I’m happy about is that I kept on seeking education because I knew I should start now… Read more »

Kristy @ Master Your Card
Kristy @ Master Your Card
11 years ago

Love this post, J.D.! I do have to disagree on one point, though. I don’t think financial independence is another name for retirement. There are plenty of people who retire and can’t actually afford it, and they end up going back to work. Retirement is simply the period of your life where you stop working and I think most people would like to be financially independent – whatever that means to them – at that time. Unfortunately, that’s not always the case. But, to define it for me. Financial independence is the freedom to wake up when I choose, knowing… Read more »

Ari Lestariono
Ari Lestariono
11 years ago

It is everyone destination to have financial freedom, prior to that steps one must value the meaning of spending their money, keep efficient and only buy things that is requires.Just living simple, don’t you think living simple is healthy?

plonkee
plonkee
11 years ago

At some point most people have to give up work, because they simply are not fit/well enough to work any more. Lots of people would prefer to not have to work before they get to that stage. Whether you then choose to work anyway is besides the point I think. For me a lot of the financial independence stuff is all about removing the fear that I’m going to be homeless and begging on the streets one day. That’s really not a likely scenario, but if I was less reliant on employment for my income it would become even less… Read more »

Garry - thisimprovedlife
Garry - thisimprovedlife
11 years ago

Financial Independence for me means that I will have the freedom to pursue interests and business ventures I have without impacting our current lifestyle.

Adam @ Checkbook Diaries
Adam @ Checkbook Diaries
11 years ago

My idea of financial independence is not relying on an actual job to support my lifestyle and my family. It also means being completely independent of creditors and debt. When I eventually become financially independent, and no longer require the typical 9-5, I’d like to donate 15-20 hours a week to building homes for habitat for humanity, and give free courses to parents on educating their children about how to become financially responsible.

Debbie M
Debbie M
11 years ago

I think you can never be fully financially independent. You could define it as not having to rely on a job, but then you still have to rely on the stock market, interest rates, business profits, sales/property tax and inflation not getting too high, and/or, if you’re living off the land, having reasonable farming weather. Not to mention not getting expensive illnesses, getting sued, getting divorced, or other tragedies. Nevertheless, one’s freedom can be increased. I now have the freedom to do anything I want (though not _everything_ I want) so long as I keep my job. That’s awesome. And… Read more »

John Steed
John Steed
11 years ago

The traditional notion of financial independence seems to be to accumulate enough assets (such as stocks, bonds, real estate) such that one can live off the income from these assets without having to work. Unfortunately, it’s not practical for all but a small percentage of the population. Why? Because it’s our work that generates the earnings that companies pay out as dividends or interest, that allows landlords to collect rent, and that allows governments to levy taxes and pay interest on the bonds they issue. If we all stopped working, there would be no earnings, no rent and no taxes… Read more »

Corporate Barbarian
Corporate Barbarian
11 years ago

Having just finished reading the update to Your Money or Your Life, I would have to say that Financial Independence to me would mean that my passive income would cover my normal expenses, and that the loss of my job wouldn’t be catastrophic to my standard of living.

Andy
Andy
11 years ago

this is an awesome series of posts. thank you. as usual, you’re going to get different definitions from different people. in my situation, my wife and i are working feverishly to pay down mounds of debt. we both wish we had done so in our 20s, but so be it. i’m nearing 40 and we have a 3-year-old girl. we’re teaching her about money and she has already grasped “save money, no debt” = a lollipop. we’re going to teach her as much as possible. we’re on a good path and will right our wrongs while teaching our child along… Read more »

Moneymonk
Moneymonk
11 years ago

Financial Independence means a boring life

Charlotte
Charlotte
11 years ago

Very well said Tyler! FI and Retirement can only be defined by each individual. As for us, having an “end result” in mind is not what we are shooting for. Our goals are written in stages, tailored to the lifestyle we want in every stage. Like Tyler, one of our goals is to start a family. This is not necessarily a financial goal (although undoubtedly involves money) but a stage in life we would like to be in someday. That has nothing to do with FI necessarily. We are constantly re-writing our goals but as far as FI is concerned,… Read more »

jg
jg
11 years ago

I like what debtheaven said about smaller spurts of financial independence. I’m 26 and in graduate school – needless to say, I’m not near any sort of permanent financial independence. However, I have been careful with my limited funds, and was therefore able to take a couple months off from grad school (and therefore receive no pay through my assistantship) and spend time with my family at a time it mattered most – without having to worry about how I’d pay my rent. I’m now looking for a job, and I find I can be just a bit pickier than… Read more »

Ann
Ann
11 years ago

Financial independence is writing full-time…without having to eat Ramen noodles or KD.

TStrump
TStrump
11 years ago

To me, financial independence means not having to rely on a job to pay the bills.
It means I’d only work if I was bored and needed something to do or actually loved what I did.

BeyondBeerMoney
BeyondBeerMoney
11 years ago

Great post! I love the definition of financial independence in Your Money or Your Life and work toward achieving it by focusing on “Bang for the Buck” (i.e. spending money on things I get the most pleasure out of, i.e. traveling, and cutting those that are less important to me, such as eating out at fancy restaurants).

While I still have a ways to go toward financial independence (and certainly toward being rich) small changes and keeping up to date with the great info on your blog are helping me along!

Thanks!

reallysparkle
reallysparkle
11 years ago

Financial independence to me is being able to do what I want without having to have a conventional job. I guess the definition isn’t totally black & white for me. First I thought it would mean not having to work, but then again, I hope to have my own company one day, and I don’t know if I’d consider it “working”, necessarily, if it was what I wanted to be doing. I guess being able to set my own hours and have enough in the bank so that if I didn’t want to “work”, I wouldn’t have to, is what… Read more »

La BellaDonna
La BellaDonna
11 years ago

To me, financial independence means not having to rely on a job to pay the bills. It means doing what I love, without needing it to live. Like Plonkee, I’m working so I’m not homeless on the street. I don’t know that I’ll ever achieve financial independence, though, short of six feet of ground to call my own. Moneymonk, since I see Financial Independence as very nearly ultimate freedom (except for that six feet of ground), how do you define it so that you come up with “boring life”? I think “freedom from fear”; I suspect you must be thinking… Read more »

Kenny
Kenny
11 years ago

OK, so here is a mathematical / objective way of looking at FI. I am pretty detailed about what I am doing since I am in this stage of life where I have set my goals to be an FI more than 23 years ago….. FI means: AFE + ITFE < A + AAIG (see meaning below) Annual Family Expenses for remainder of my life + One Time Family Expenses for remainder of my life < Assets + Automatic Annual Incomes Generated Here is how I took the formula pretty far along: TAB 1: I generated my own customized spreadsheet… Read more »

Ali
Ali
11 years ago

To me, FI means being able to make major life decisions without finances being the primary determinate of the outcome. (i.e. My decisions are independent of my finances.) I am not sure when that will be, but right now we still have a mortgage and 3 young kids, so we definitely are not there yet. An example is that when deciding if we will take a vacation this year, our finances were the primary consideration.

Anne T Meyers
Anne T Meyers
11 years ago

I love this post. It’s so rich (ha ha!). Seriously, it’s a downright spiritual take on money, and so well said.

To me, pragmatically, financial independence means having control over money, rather than it controlling you, living within means, and dveloping alernate avenues to acquire revenue should your income be cut off.

For the part about learning to manage money as a teen, I thought I’d offering up my blog for further discussion. I’m a college professor and journalist specializing in teaching kids about money management.

My blog is Ask Anne–giveme20.com/blog.
–Anne T Meyers

porcupine
porcupine
11 years ago

FI to me: that I can die and know my family will be fine. Financial Freedom is that stage where I don’t want to die because I can help others by using my finances.

Life insurance happens when FI and FF are still goals. When I can cancel that, I have reached FI, and am working solely because I love it.

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