The personal finance community (and increasingly everyone else) write a lot about financial independence and early retirement (FIRE). We often take the concepts’ meaning for granted.
But what is actually the definition of financial independence? What do we really mean when we talk about the first part of FIRE – the “FI”?
There’s no easy answer to this because financial independence means something different to everyone as you will see below. Most people agree it is a worthwhile financial goal to pursue though.
I also believe you should try to find your own definition of financial independence and find out what it means to you.
To help you get there, I have compiled the ultimate list of financial independence definitions as inspiration.
The definitions range from technical definitions of how you mathematically achieve FI to philosophical definitions of what you actually do when you achieve financial independence.
My own financial independence definition
I thought a lot about whether I should add my own definition to the plethora of already existing definitions, or whether I should just pick my favorite amongst the already existing ones.
But then again, it wouldn’t be fun to write about financial independence definitions and not come up with what I consider a perfectly curated definition myself 🙂
To me, financial independence is:
Being able to support your desired lifestyle with income from your assets and/or desired activities without having to work for anyone else again.
Why do I like this definition of financial independence? I believe it is quite short and precise. Let’s look at the different parts:
- ‘Support your desired lifestyle‘ because it gives you the opportunity to define exactly how you want live in the future – and it assumes you should be able to cover your future lifestyle’s expenses and not just your current expenses.
- ‘Income from your assets‘ because a popular way of achieving financial independence is to accumulate assets and rely on the income they generate (e.g. stocks, bonds and rental properties).
- ‘Income from desired activities‘ because assets are not the only income source when you are financially independent. Many people still (want to) be engaged in side-hustles or part-time activities/work they truly desire which can lead to an income.
- ‘Without having to work‘ because it highlights the fact that you never have to work again, but you are free to do so if you want.
- ‘Anyone else‘ because it can involve both employers, clients if you have your own business or, yes, anyone else.
- ‘Again‘ because it puts an element of timing into the definition highlighting that it should support you indefinitely.
Don’t like my financial independence definition? No worries, there’s plenty of other more clever people than me who have written great definitions.
Financial independence definitions from personal finance bloggers
Initially, I had all the big sites on the web (e.g. Wikipedia) up front, but I simply liked the personal finance bloggers’ definitions better:
Early Retirement Extreme:
“Being able to meet all current and future cash outflows with passive cash inflows.”
“You are not beholden to a job to provide for your livelihood. Instead, your wealth supports your lifestyle.”
“Income from sources other than your full time job covers your living expenses.”
“No need to work for a living because investment income or non-work income covers all living expenses into perpetuity.”
“You are not beholden to a job to provide for your livelihood. Instead, your wealth – acquired through a high level of income or aggressive savings plan, supports your lifestyle. While you may still work, you don’t need to. You work because you enjoy it.”
“Having enough income from your assets to cover your essential expenses so that you can survive without ever having to work again.”
Women Who Money:
“Reaching financial independence means you have enough income to pay for your living expenses for the rest of your life without having to work.”
The Simple Dollar:
“Financial independence means that you have enough money to survive without further income.”
The College Investor:
“You have enough money that you never have to work again. You can choose to work because you want to, or get bored, but you don’t have to.”
The Physician Philosopher:
“The point at which your monthly passive income streams equal your monthly spending.”
ChooseFI (Jonathan Mendonsa):
“When your net worth is 25x your annual expenses, you’re considered financially independent.”
“Living comfortably and doing what I want with my time without concern about how much income I earn.”
Our Next Life:
“You can shape your life without taking money into consideration.”
“You have sufficient resources to give you the freedom of choice, to sustain a lifestyle that allows you to pursue whatever truly makes you happy – to leave a high stress job for a lower paying one that’s more satisfying, take some time off for whatever reason, go back to school, or write a screenplay”
“Having a net worth providing an amount of passive or near passive income that allows a person to no longer actively work for money if he or she chooses”
“Being able to support your lifestyle without having to work”
“You have enough money to live for the rest of your life without working (if you wanted to never work again).”
Your Money Geek:
“Having sufficient passive income and/or sufficient investments to cover your living expenses.”
Interestingly, many of the definitions are very similar, but they also have a few distinctions. Most focus on work, some focus on assets, some focus on passive income, some focus on side-hustles, some focus on future lifestyle choices, some focus on expenses and some focus on worrying about money – most focus on a hybrid of these.
I’m not going to judge any of them. Even though they all cover the same topic of financial independence, they are slightly different, and this only gives a great flavour to our personal finance community 🙂
Financial independence definitions from the big guys
Wikipedia is hard to avoid since it is the first result on Google when you search for financial independence:
“A state in which an individual or household has sufficient wealth to live on without having to depend on income from some form of employment.”
Investopedia usually has a definition for everything finance:
“The ability to live more or less as one wants to, within reasonable limits. It may not mean the absolute freedom to never work another day again, but it may mean the ability to quit a bad job, go back to school or start a new business without major sacrifice. Likewise, financial independence should mean the ability to deal with life’s ups and downs without scrimping, sacrificing or going into debt.”
Reddit has a rather short definition:
“Not having to work for money.”
Urban dictionary is not always a credible source and this one falls under that category:
“The point in life when your finances are separated from the finances of any other authority on Earth and by definition you are not sharing a purse with the rest of society.”
Business dictionary is a quite :
“Individual or family that can provide for, from its own resources, at least two of the three major expense categories: housing, food, and other living expenses.” (Huh?!)
Good thing we have personal finance bloggers and don’t need to rely on these big sites, right?
Your own financial independence definition
Let me finish off by saying there’s no such thing as a single financial independence definition.
I encourage you to read the definitions above and continue investigating literature and the world wide web to find your own favorite financial independence definition(s) – if you need one at all 🙂
Your turn: Which financial independence definition is your favorite?