Financial Independence Definitions – The Ultimate List

Financial independence definitions

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.”

ESI Money:
“You are not beholden to a job to provide for your livelihood. Instead, your wealth supports your lifestyle.”

Retireby40:
“Income from sources other than your full time job covers your living expenses.”

Financial Samurai:
“No need to work for a living because investment income or non-work income covers all living expenses into perpetuity.”

ThinkSaveRetire:
“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.”

MadFientist:
“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.”

20SomethingFinance:
“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.”

Boomer&Echo:
“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”

Fiology:
“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”

MoneySchool:
“Being able to support your lifestyle without having to work”

Sloww:
“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?

9 comments

9 comments

Pensija40 January 2, 2019 - 17:02

“Not having to work for money” is spot on. You may still work if you want, you just don’t have to.

Reply
Carl January 2, 2019 - 17:11

I like that – short and sweet 🙂

Reply
[email protected] December 29, 2018 - 02:38

Thanks for including my definition. I’m looking forward to exploring your site, Carl.

Reply
Carl December 29, 2018 - 16:00

Of course, David! Thanks for a great definition 🙂

Reply
Joseph Beckenbach December 28, 2018 - 14:26

I prefer the pre-blog expression from Joe Dominguez and Vicki Robin’s classic “Your Money or Your Life”.

“Financial independence is the experience of having enough … and then some”. (Their ‘step 2’, page 55 in the 2008 edition.)

They extend this with being debt-free (step 5, page 150+), and advocate realizing it by “a safe steady [investment] income for life from a source other than a job” (step 8, page 243).

@fupt — this measures by actual income, not how much capital generates the income; their ‘step 9’ sets up criteria and walks through one (US-centric) investment choice as an example. Trinity study shows that, for US 30-year portfolios, 4% inflation-adjusted draw-down of 50% stock / 50% bond asset allocation would survive in the historical record more than 95% of the time; thus “4% rule *of thumb*”.

@carl — interesting counterpoint: ‘step 4’ (of nine!) in “Your Money or Your Life” brings one to calculate how much money is enough *now*, while normal tracking (step 5) and frugality (step 6) would naturally stabilize the number. One-time anticipated expenses aren’t addressed directly, though one usually gathers that money however one gathers the income-producing capital.

Reply
Carl December 28, 2018 - 22:46

Excellent input, Joseph!

I also like the Dominguez and Robin’s take on FI as it is less focused on numbers with five decimals and more focused on the experience of FI. The question is then whether “income for life from a source other than a job” is precise enough. I guess it depends on what the definition of “a job” is.

Calculating how much is enough now is often the best current answer we have on future spending, so I believe it is a great starting point – and it can give you a good idea about how long time reaching FI could take. I’m just a bit allergic to the discussion of the exact right safe withdrawal rates and people trying to predict the future 10-20-30 years from now when so many things can happen (positive and negative) that will influence the journey. That’s why using safe withdrawal rates (as you say) as a rule of thumb is exactly the right thing to do.

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FUPT December 27, 2018 - 21:09

If you want your FI to support you indefinitely, then you can’t use the x25 your yearly expenses or the 4 % rule, because they all rely on the trinity study. That your FI will be 95% likely to last 30 years.
Indefinitely is just a really long time 🙂

Reply
Carl December 27, 2018 - 21:29

You are very right 🙂 Although I feel there’s a need to keep things simple and not focus too much on the spreadsheets when we talk about FI. I’m not a fan of trying to calculate down to the penny how much money you need to sustain your expenses into infinity – it simply cannot be done. FI is a dynamic journey with moving parts, so the 4% rule will be a good goal for many people even though they will of course have to adjust their journeys to market fluctuations, life curveballs, side-hustle income etc. as they go along.

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Joseph Beckenbach December 29, 2018 - 14:42

@fupt — also interestingly, others have done follow-ups exactly on this. Big Ern over at the Early Retirement Now used some of his post-FI-transition free time to explore thoroughly. His post at https://earlyretirementnow.com/2016/12/07/the-ultimate-guide-to-safe-withdrawal-rates-part-1-intro/ starts the series. (The Trinity study and similar were done before the long-term data-sets on returns came into being, and before serious number-crunching was generally available to civilians. Big Ern’s work relies on both.)

Summarizing with other results: For US depletion portfolios with at least 60% stocks and 5-10% bonds, historical record gives no failures at 3.25% withdrawal rate for 45 years and 3.00% indefinitely. These worst-case values come from declines followed by long flat markets; Big Ern’s series also addresses this “sequence of returns” risk, with ideas on mitigation.

PS: Investing enough in income-producing holdings (dividend stocks, real estate, business ownership) lets you side-step the “safe withdrawal rate” debate entirely, by handing you more income than you spend (or even can spend responsibly). The “rentier” or aristocratic option, if you will. Ignore the market fluctuations, and live off just the streams (eg, using Coca-Cola dividends is popular in the US Southeast).

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