It has to come. Yes, it has to. Of course, I mean financial independence. I am especially talking to you young colleagues more, especially those of you still staying in your parent’s homes years after starting work. Yes, my finger is also on the spouses that rely on their partner for support. If you don’t plan for financial independence now, it will ambush you because your parents or loved ones will not be there forever. Hey parent! I am also talking to you.
There are many definitions of financial independence. But I do mostly subscribe to the one that points to freedom from financial reliance on loved ones. This is a freedom that many young people earn in their late teens to mid-20s, as they get through college, earn a degree, find a job, and separate themselves from their parents. For many people, this is financial independence. They strive to be their own person, independent of the people around them, capable of standing on their own two feet. If you can survive for a significant period of time (multiple months) without going rapidly into debt or without a steady cash infusion from your family, then you have achieved this goal. Generally, it requires a decent job or business, a commitment to keeping that job, and a desire to actually move on from a state of dependence.
But there is yet another important aspect of financial independence—the freedom from financial reliance on creditors. This freedom occurs when you are completely free of debt. No mortgage, no education loans, no car loan payments, no anything. If you are this free, it means aside from taxes, you are free to do what you want with all of your income. This is often used as the definition of financial independence by personal finance advisors advocating for a strong anti-debt position.
Take note that having some productive loans is encouraged for growing your own wealth. Setting this type of independence as your goal takes a strong commitment to the “spend less-than-you-earn” philosophy. You need to be willing to directly put some of your income straight into large debt payments in order to get rid of that debt. This requires enough income to cover your basic expenses and more, a good grasp on how to control your spending, and a debt repayment plan that you are committed to. If you are willing to take on all of this, then you are probably ready to take on this goal.
Finally, but perhaps very important, is the financial independence that reflects freedom from financial reliance on employment. Many financially stable people view this as true financial independence: an end to the financial reliance on employment. It doesn’t mean you have to stop working, it just means that income from your work is no longer a requirement. You have got a number of businesses and investments (financials like shares, real property, farms, etc.). In this case you tend to give the best of yourself on your job because you work without fear or favour—you aim only at preserving your integrity as a star performer but don’t fear being fired.
Many of the same principles for debt reduction apply when seeking freedom from financial reliance on employment. Spend less than you earn and invest the rest of it for the long term. Work on maximising your income and minimizing your spending and sock away that difference into active and passive investments (which you don’t have to manage yourself, like shares). This means not only maximising your career, but maximising your frugality, too—know the real value of your time and do things with that time that produce value.
Financial independence is a great goal, but as with any goal, you have to define exactly what it means for you and then define a plan to meet that exact goal. Without that exact definition, you are just whistling in the dark.
A blessed week-end to you and yours as you plan to move out of your parent’s house and pursue these financial independence goals. n