Independence Hall, Philadelphia
What is financial independence? It’s an interesting question and one we should ask ourselves today, as we prepare to celebrate the July 4th holiday.
Traditionally, on the Fourth of July, we honor the independence of the U.S. and the signing of the Declaration of Independence (adopted by Congress 237 years ago). We also honor our own individual freedom. And when we speak about the principles of independence and freedom, we often explain how they allow us to go wherever we wish, speak to whoever we wish, and say whatever we wish. In the simple yet elegant words of the Declaration of Independence, we each strive for the freedom of:
Life, Liberty and the pursuit of Happiness.
It’s interesting to note that, right at the heart of those words are the complementary ideas of security and desire. And those are the two ideas that also help us define financial independence. Below, I’ll try to explain four different definitions I’ve come to understand that provide an answer to the question “What is financial independence?”
1. Having Your Basic Needs Met
When you transition from adolescence to adulthood, one of the most striking things you learn is that the day-to-day life you’ve been accustomed to for many years is expensive. The house you live in, the food you eat, the car you drive in — they all cost money on a monthly basis. When you move out on your own, this realization often sinks in quickly and that’s where this first definition of financial independence comes in.
In the most basic way, being able to provide food and shelter for yourself (and your family) is the first level of financial independence. This is where the idea of security comes in. A large percentage of Americans have this level of financial independence, yet unfortunately some people do not. And as we contemplate the meaning of the phrase “financial independence” itself, this is a sobering reminder that even the most basic definition of financial independence is something to strive for and to be grateful for. If you are working to achieve this first definition of independence, you can start by maximizing your savings account. And utilize our Budgeting Tips resource center if it’s helpful.
2. Having No Debt
This second definition is of particular importance to me and to all of us at ReadyForZero because our mission is to help people all over the U.S. pay off their debt. While debt is a situation that many of us find ourselves in, for a wide variety of reasons, the core experience of being in debt does not change much (at least, in my experience). No matter the cause or size of one’s debt, it frequently makes the debtor feel not completely free. Owing money to another person or institution prevents you from being able to use your money as you see fit. When some portion of your monthly paycheck is eaten up by the minimum payments on your debts, it makes you feel that you are not independent.
This is where the idea of wants comes into play. We all have wants and desires, and to the extent that being in debt prevents us from pursuing those, it constricts and limits our personal freedom. So what to do? If you’re ready to tackle your debt, you can use our online tools to create a plan to become debt free. If you’re having trouble with a particular type of debt, you might want to take a look at our Credit Card Debt and Student Loan Debt resource centers.
Ready to pay off debt faster?We can help you make a free, personalized plan to pay off your debt as quickly as possible. Our free tool shows you which debt to pay off first. Try it now.
3. Having No Need to Work for Someone Else
This third definition of financial independence is the most commonly accepted one, I think. In this definition, we can understand that no one can be truly independent so long as they must work for someone else in order to keep their finances in order. Even those who earn lots of money but who must work for another person indefinitely are not able to pursue all their wants.
A parallel idea here is the goal of building your retirement fund. It’s this goal which inspires so many Americans to save up gradually over the course of their whole lives, to invest, and to wait until they have a sizeable nest egg to end their careers in the hopes that retired life will give them the freedom to pursue happiness however they so choose.
4. Having the Ability to Fully Pursue Your Dreams
A final definition of financial independence is the most extreme and the one which for most of us seems the most out of reach: the ability to pursue all your wildest dreams without thought to the cost. For example, if your dreams included traveling to Argentina, filming a documentary there, writing a soundtrack, producing the film, and promoting it all over the world, you might need hundreds of thousands (or even millions) to accomplish it. Or if your dream was to build a large house near the beach in Hawaii and retire there, that dream too might require six- or seven-digit sums of money. For some this type of financial independence may be an inspiration, while others may think this particular definition is not even worth considering because it is so out of reach for most of us.
So what about you? Which of these four definitions do you agree with? Ultimately, the definition of financial independence is up to each of us because it is such a personal thing. As long as you have a definition that works for you, that is what really matters. We’d like to hear your thoughts — please share your own definition in the comments below.
Image credit: wallaceweeks