Financial Independence: no bull, nothing to sell
Some people work their whole life, while others retire early. Some people retire and live comfortably, while others have to depend on children and friends. The second group is financially independent, the first group is not. What makes the difference?.
- Is it because one group is smart, the other not smart?
- Is it because one is hardworking, the other not?
The answer is neither: intelligence and diligence are not the key success factors in financial independence. Below we explain:
- What is financial independence?
- Why be financially independent?
- How to be financially independent?
What is financial independence?
Put simply FINANCIAL INDEPENDENCE is the state when your unearned income is enough to pay for your expenses. You can be financially independent when you spend a lot and your unearned income is high enough. You can be also financially independent when you have much less but your expenses are low. So net worth is a factor, but just as important is your expenses.
There are also degrees of financial independence. Let’s go from DEPENDENCE to INDEPENDENCE.
- If my expenses exceed my income month after month, I am not financially independent, and unlikely ever to be.
- If my savings (including liquid investments) exceed 12 months’ expenses, I have a basic degree of independence. If I lose my job I have enough to spend while looking for another job.
- If I rent, and my liquid net worth exceeds 5 years’ expenses, my freedom is greater than the case before this.
- If I own my home with a mortgage, and my liquid net worth exceeds 10 years’ expenses, my freedom is further increased.
- If I own my home without a mortgage, and my liquid net worth exceed 10 years’ expenses, I have more freedom to make choices in my career.
- If your liquid net worth exceed 20 years’ expenses, it is probable that you have enough to live on without working. This is full FINANCIAL INDEPENDENCE. It doesn’t mean you have to, but you have the choice.
Why be financially independent?
There are many benefits of being financially independent:
- You have no worries if you are out of a job.
- You have no worries if you are unable to work for health reasons.
- You don’t have to go to work if you don’t want to. Have you experienced weeks or months when you couldn’t stand your bosses or subordinates? When you feel what you do in the office is just to pay the bills?
- You can do what you want with your life. Enjoy your spiritual pursuits or travel, be a doting parent or grandparent, study or just relax.
How to be financially independent?
Observations of people over several generations simply suggest this: Financially independent people have recurring income from investments. They have investments because they saved, and learnt to invest. They were able to save because they spent much less than they earned. Finally they were able to have good earnings because they learnt.