You have FINANCIAL INDEPENDENCE when your unearned income can pay for your expenses. You can be financially independent when you spend a lot and investment income is high. You can be also financially independent when you have much less assets 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 exceed 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 option.