What is financial independence? Well, what’s financial dependence? Independence versus dependence. Good versus evil! Independence is always better than dependence, right? The 4th of July is Independence Day! That’s good. If your boyfriend or girlfriend ever says, “I like you, but you’re really dependent,” you can be sure you’ll soon be hearing the “It’s not you, it’s me” breakup speech.
Financial dependence means you are depending on something, but what? You are depending on the income you make from working to pay your bills and to live. To rent an apartment, pay your car loan, and buy food, you need to depend on the money you earn from your job. That’s financial dependence, and it’s how most people live.
Contrast that with financial independence. Financial independence is about having enough investments so you don’t have to work another day in your life. It is where you are not depending on your salary from work to pay your bills. Although you may still decide you want to work, you are not required to work to support your lifestyle. You have the choice to work or not.
What do you need to be financially independent? Financial independence involves earning enough passive income to support the kind of lifestyle you desire. Financial independence is not about being “rich.” To be rich, you only need to make or have a lot of money. As a result, there is no “magic” amount of passive income required — it is entirely dependent on your expenses. Let me show you a couple of examples of how this works.
If you earn $100,000 in annual passive income and have expenses of $85,000 per year, you are financially independent. If you have $500,000 in annual passive income but have $750,000 in expenses per year, you are not financially independent.
Therefore, financial independence is having enough income coming from passive sources, such as rental income and your investment portfolio, to pay for your desired lifestyle.
The proceeding blog post is an excerpt from Get Money Smart: Simple Lessons to Kickstart Your Financial Confidence & Grow Your Wealth, available now on Amazon.