Financial Freedom Versus Financial Independence – The Difference & Do You Need Both?
Most people say they want to save more money. And most people also say they want to get out of debt. But the truth is the majority of the population is mired in debt with little or no money saved at all.
You know the stress when something unexpected happens. When the car breaks down, when the washing machine breaks, when you have to call the plumber because water is running down underneath the sink onto the floor. If you're like me you've experienced all these things before.
And the stress is not because you have to call repair people to get these things fixed, it's because you're wondering where you going to get the money to get it done.
You always seem to get the money, but the stress and anxiety takes its toll. It should be easier than this, and in truth it can be.
It really doesn't take much to alleviate 90% of the stress related to an unexpected bill. Most unexpected bills amount to less than $1000. Just having an emergency fund for that amount can literally relieve you of the majority of your financial stress in my opinion.
And you always make ends meet, even though you think you don't have a dollar to spare. You end up getting what needs fixed – fixed, but you are just going about it in the most stressful way possible.
Most people think of financial freedom as being able to buy anything or do anything without having to worry about the cost. But I don't think that's what financial freedom means.
I think financial freedom means not having to worry about money. And when I say that, I mean not having to worry about being able to pay your bills, paying for an unexpected repair, paying for gifts at Christmas, or wondering how you'll be able to take your family on a small vacation.
Yeah course if you're a millionaire you may not have to worry about these things, but there are people who make a ton of money still living paycheck to paycheck. I know many physicians who would be up a creek if they had to miss two weeks of work due to illness or an unexpected event.
So financial freedom is not dependent on the amount of your income. It is dependent on the amount of your expenses related to your income. Granted it should be easier to maintain a higher standard of living if you have greater amounts of income, but it's how you manage your expenses compared to what you make that allows you to have financial freedom.
Financial freedom therefore to me is the reduction, to as low as possible, of financial stress.
Financial independence is the ability to sustain a standard of living that you decide on without having to be employed.
This is basically what makes you effectively able to retire. It doesn't mean you have to retire, it just means that if you wanted to you could.
Now you still have to have income, or money saved and available to cover your expenses. Because you will always have expenses. You still have to pay utilities most likely, unless you live off the grid somehow. You still have to buy food, pay taxes, and other things just to survive.
But financial independence means you are able to cover all your expenses from money outside of working. How you do this can take on many different forms. Some people may earn royalties from previous work, some of you may even be a trust fund baby who has had your money given to you, others have saved and invested and earn income from those investments.
No matter how you do it, if you have income coming in to cover your living expenses outside of employment, then you are financially independent.
Do You Need Both?
I think the goal should be to become both financially independent and have financial freedom. This is where all of the stress related to finances should go away.
If you're financially independent, you don't have to worry about losing your job. But being financially independent does not necessarily mean you have financial freedom. Just because you can cover your living expenses doesn't mean if something unexpected arises you would be able to effectively deal with it financially.
Someone could theoretically be financially independent, because they have such a modest standard of living, that they could live off of a small amount of income from savings and not have to work. But they would still have to worry about money if something unexpected occurred.
Financial freedom coupled with financial independence should therefore be the goal. This not only decreases your financial stress but also allows you to pursue your own interests. It doesn't mean you have to stop working. It just means that you would have the ability to do work that you want to do.
I would argue that many of the people who have achieved both of these goals continue to work in some fashion. Most likely they are doing something they are passionate about and therefore monetary gain from these activities aren't the priority. But there's no reason that these activities could not make money.
Whether you continue to work after you have achieved this level of freedom and independence is not the issue. The issue is that you now have the choice, and to me that is what it's all about.
Let us know your thoughts.