Morning! Today I am having Anton who is going to talk about Financial Independence. Anton Ivanov is an aspiring financial writer, a successful investor and a zealous entrepreneur. He is extremely passionate about helping others become financially independent and shares his financial knowledge at Financessful. You can follow his updates on Twitter, Facebook or RSS.
Let me know if you would like to guest post on RFI. Alexandra from Real Simple Finances is over at Make Money Your Way talking about being too busy to make more money.
You hear the term financial independence quite a bit these days. It often comes up in conversations, is frequently mentioned by the media and can be found in abundance online. That’s not a surprise – financial independence is a much sought-after goal. Often synonymous with retirement, it can be considered the pinnacle achievement of one’s professional life.
But financial independence is a vague and very personal concept – we all define it a little differently, if at all. Some have a pretty good idea about what it means to be financially free. Others have only a vague understanding. I wanted to share with you what it means to me and why I think so many struggle to achieve financial independence.
Financial Independence is the Freedom of Choice
Most working adults don’t have the freedom to get up in the morning and say – “I don’t feel like going to work today, so I will spend the day with my family instead.” Sure, there are weekends, sick days and vacations, but the vast majority of people depend of their job for income. They need this income for food, shelter, medicine and other basic necessities. They also depend on it for recreation and entertainment.
The majority of people simply cannot afford to quit their jobs. They continue trading their time for money decade after decade. And if they have poor spending habits and don’t fully understand the importance of saving and investing, they may become slaves to their job until they die.
What Does Financial Independence Really Mean?
Financial independence breaks this enslavement and gives you the power of choice to do whatever you want every single day. If you want to go to work – you can. If you feel like taking the day off to go to the beach – no problem. If you want to go to South America for a month-long vacation – you don’t have to wait a day to do so. And if you don’t feel like working another hour of your life – that’s entirely possible as well.
When you have passion at your job, you have the opportunity and the money to afford the lifestyle of your dreams.
The Freedom of Choice Has a Price
Of course, becoming financially independent is easier said than done. To have the freedom to do anything you want in life without working, you need income to replace your salary and sustain your lifestyle. This income is usually derived from income-generating assets such as bonds, dividend stocks, rental properties or savings accounts.
Your entire life can be divided into two unique parts – the working phase and the retirement phase. During the working phase your goal is to maximize your income and purchase and nourish as many assets as possible to build your wealth. Then, during the retirement phase, you can use the acquired assets to generate income and support your lifestyle.
Out of all the obstacles that can prevent a person from reaching financial independence, two of the most common ones are the lack of good financial habits and a poor ability to maximize one’s income.
Ignoring the Basics Will Get You Nowhere
So many people struggle with a lack of financial common sense. They keep telling themselves how they want to retire early, yet they live paycheck to paycheck without saving a dime. They want to “move up in life”, but have no wealth to show for decades of work. They take 2 jobs to bring home additional income, but spend it all on the latest gadgets and are hopelessly in debt.
Money isn’t a terribly difficult subject. If you make and follow a budget, eliminate unnecessary spending, live a debt-free lifestyle and save and invest as much as possible, you can reach any financial goal you set your mind to. It takes only a little bit of daily effort to build good financial habits, but they will serve you for a lifetime.
A big part of the problem is the lack of financial education in today’s schools. Many grow up with absolutely no practical knowledge about money. But it doesn’t have to stay that way. There are plenty of awesome finance books containing a wealth of knowledge. The internet is filled with excellent sources of financial information – you are reading one of them right now. So if you feel like your financial illiteracy is getting in the way, you can’t blame anyone but yourself.
Maximizing Your Income
Many may disagree, but I firmly believe that business ownership is the best way to generate a lot of income and quickly build wealth. Jobs that can match a successful small business’s income are few and far between. And it may take you more than a decade to finish the required schooling and work your way up the corporate latter. A business can be grown much quicker, if done correctly.
I don’t think that you should immediately quit your 9-5 job after reading this, but I think that everyone, regardless of their occupation, education or abilities can develop a profitable business. There are numerous stories of self-made business millionaires that come from the humblest of backgrounds.
Most people are stopped by fear. They fear leaving their job, losing a secure income source and not being able to sustain their materialistic lifestyle. They fear starting a business because they are afraid to fail and think that there is nothing they can offer that others would buy.
But if you are able to see past your fears, you will see a world of opportunities. Opportunities that can all lead to your financial independence.
How do you define financial independence? What stops you from becoming financially free within the next 5-10 years?
This post was featured on the Carnival of Money Pros, Yakezie Carnival, FI Journey, The Financial Carnival of Young Adults, Carnival of Financial Planning B, Personal Finance, thank you!
You nailed what I consider to be financial independence. I no longer have to work, but can still live the life I currently do.
That’s exactly right!
Great post Anton, to me financial independence is the point where my investment income can indefinitely cover my living expenses. This doesn’t necessary mean I will retire as soon as I am independent, but it means I have the freedom to choose. If I stop enjoying my work, I can leave without having to worry about how to put food on the table. If I decide to go on holidays, I can stay a bit longer because I don’t need to be back in the office come Monday.
Based on current projections, in ten years time I will own my home outright and be earning roughy $15,000 per year (after tax) from investment income. This is enough to cover my share of household living costs, but I definitely won’t be retiring to a beach somewhere until my partner can reach independence as well – what good is freedom if you have no one to share it with?
I agree – when you reach financial freedom, you have a choice of what to do every single day of your life. You are no longer limited by the lack of money (because you have passive income from your assets) or the lack of time (because you don’t have to go to work to support your lifestyle).
I’m on a journey to FI myself, and you defined the term the same way I do. There are various stages that will change my level of freedom between now and then (like being able to start my own business once my house is paid off, because of the flexibility that low expenses provides) but being totally financially independent is my ultimate goal. Great article!
Committing full time to a business and losing your salary can be a big deal for a lot of people, especially those paying off debt. But you’d be surprised how many part-time, low start-up cost business models there are out there. For example, your blog can in time turn into a great source of income without you working on it full-time.
I definitely agree that financial independence means freedom of choice, and I also agree that the best way to pursue financial independence is through ownership of a small business. It’s hard to become financially independent when you are on a set salary and have no potential for outsourcing work and building a company that can be sold one day.
I totally agree!
Thanks Anton! Agree that ifnancial independence does NOT involve making more money – unless you also reduce outgoings. To me, financial independence is about having enough for your daily needs, plus a bit extra to invest. That doesn’t mean necessarily increasing income (though it’s always nice!) – it’s about reducing outgoings and refusing to keep up with the Joneses. Always for me, money is about the freedom to buy more time. I measure my wealth in the amount of time I have to pursue my own dreams and pursuits – working all hours to earn a high income doesn’t signal financial independence to me at all.
You make a great point about cutting your expenses. It doesn’t really matter how much you earn – if you spend all of your income there will be nothing left to save and invest. You may have a high-paying job, but have $0 or even negative net worth.
I love how people are always saying that you should own a small business or work for yourself. Some people are just not wired that way. I personally have ZERO desire to own a small business or work for myself. I actually like having set hours and letting someone else deal with the headaches that payrolls can produce. I also like not having to worry about having to take up the slack because someone decided they don’t want to work today and just doesn’t show up. Will I get to financial independence as quick as the small business owner? Maybe, maybe not. But they may have a string of small business failures that cripples their future while I steadily bank my paychecks and save large chunks of them.
Your perspective is very common and I respect it. Business ownership is not for everybody, but only because of the fears and restraints we all create ourselves in our minds. If you have modest retirement income needs and are willing to wait 20-30 years, you can reach financial independence by working a 9-5 and saving a lot. But if you want to have a multimillion-dollar net worth and retire in 5-10 years, business is usually the only option.
Good stuff. I define financial independence as being able to do what I want, when I want, without worry that I’m wrecking my long term goal in the process.
I agree that often it’s an income problem when someone can’t reach their goals. Owning a business is a secure way to your future because there’s only one person you can blame when/if you fail: yourself. I love betting on me!
I like relying only on myself and my work as well!
I think there are many routes to financial independence, but they all focus on cutting out wasteful expenses and increasing your assets to the point that they deliver income that can cover the remaining expenses. Building a business is a great route, but I think you can achieve it just as quickly as an employee. It’s all about understanding what you want and then making and executing a plan to get you there.
I agree that there are different routes to financial independence, but I don’t think you can achieve it just as quickly by being an employee. Of course, this depends on your retirement goals, but most people don’t have large enough salaries to quickly build wealth. And those who do have often spent decades in school and working up to their current position.
Good post. As others have said, I define it as having freedom and the ability to do what I want when I want without any real concern. As someone who runs their own business though, I’d say that achieving that is possible through working for someone else – albeit maybe a little more difficult.
I wouldn’t even say it’s more difficult, just usually slower and you may not be able to have a retirement that you want.
I think you can achieve financial independence early from a salaried job, but it has to be a big salary and you have to save a large percentage of your income. Owning a business is a better way to build wealth if you do it correctly, but there is also a lot more risk and no safety net if you fail. Regardless, having the right mindset and not letting lifestyle inflation take over are key if you want to be financially independent.
There is definitely more risk associated with business ownership – but much more reward as well. If you learn how money works early in life, you can usually afford to take that risk and start your own company.
The way you defined financial independence is pretty accurate, Anton, and I think it would apply to most people (even if they don’t actually realize it). Many of us could probably reach FI much sooner than we think, but we don’t because it’d require living a very frugal, minimalistic lifestyle. When people think retirement, then envision traveling the world or relaxing on a tropical beach with a drink in hand. It’s hard to accomplish that level of FI. Somewhere in the middle is probably the most sensible and realistic approach.
It is important to have your retirement goals clearly set, so you know what you are working toward and you know “when to stop”. You can really retire at any time – it’s just a matter of how much passive income you will be earning.
“A big part of the problem is the lack of financial education in today’s schools. ” Although lack of personal finance education in schools is a fact, studies have shown that the home environment and expectations are far more important in whether or not a person will achieve in life.
By the way, I’m financially independent (have been for years) and did not do it through self employment.
I completely agree with you that what people see and experience at home has a huge impact on their own values and principles. With so many people having poor financial habits, many children grow up having them as well (and it doesn’t help that they don’t get taught about money in schools).
Congratulations on reaching financial freedom!
Anton, I really enjoyed your post. I see so many families living way beyond their means – those who make lots of money and those who don’t. It seems most people I know are spending right up to and beyond what each paycheck will cover and they have no savings, little retirement, and no emergency funds. When we left public school teaching, my husband and I had debt (still do), but we started our own businesses. We make less than we did but because we paid off several loans, increased our contributions to our retirements, and decreased our spending, we have made it a possibility that we will become financially independent before we die! I never thought that was possible before, and honestly hadn’t heard of financial independence before last year.
I do agree with Marie about family influence and think that we should include a financial planning component to our curricula. I think it would have benefited me much more than learning algebra or being able to name the presidents!
I agree with you that parents should spend a lot more time teaching their kids about money. I would even argue that finance should be the #1 taught subject at home (after a certain age). If you don’t learn how money works and how to use it to your advantage, you will most likely not succeed in life.
I believe financial independence means being able to spend my time and money on things I value.
And having the financial means to do so!
I would love to be a parent at home with my kids when I eventually have kids. I won’t be able to initially, but with the free childcare I will get from my mom (who will be living with us) I will be able to keep working to save until I get to that point where I can stay home too.
A great reason to become financially independent!
I think people can achieve financial independence through a combination of salary jobs, side business, and savings. I do think you have to live below your means. Or just marry rich! LOL
Living below your means is definitely a must. If you spend all of what you earn, you will never get wealthy. Marrying rich does help, too 🙂
Love this, Anton!! We have a ton of debt right now, but also have every intention of being financially free in 5-10 years. I agree so much with what you said about lack of education being a huge problem. No one is teaching the kids how to handle the money, or the dangers of debt. Instead, the media is constantly bombarding them with messages about “stuff” they “need”. As for our family, we are working diligently to achieve financial freedom and to teach our kids to do the same.
Awesome! Sounds like you are in charge of your future and heading in the right direction! I wish you all the best in the future 🙂
To me financial independence is reaching a point where money doesn’t dictate how I live my day to day life.
Very well put!
To me, it’s someone who doesn’t have to rely on others for money – including income from a job. While we have no debt and can financially support ourselves, we still rely on income from jobs to support our lifestyle. To me, if you were financially independent you wouldn’t need that. Your money would be working for you, not the other way around. We hope to get there by retirement.
That’s exactly my line of thinking as well.
Great post! Financial Independence really is the freedom of choice. It gives you the opportunity to wake up in the morning to say, this is what my day is going to be like, and I’m in charge of it. If we want to reach this certain point in our life whether it be on time or early we need to work hard now to make our dreams come true.
I absolutely agree. Having the power of choice is wonderful, since you can really focus on what you feel is important – spending time with your family, friends, helping others, improving your community and so on.
Anton!! As we keep paying off debts and saving/investing, we can feel the pressure lessening and the shackles being thrown off. And you are quite right about a lack of financial education in our schools, but I suspect the same can be said of our households. Our schools just plain suck in general, but that is for another place. And from experience, I must agree that owning a biz is a great way to earn. My wife and I began earning the same income from 1/2 the hours in 2005 after ditching our 9-5s and opening a guitar/tutoring studio. What a pleasure it has been. Great post, Anton!!!
I know the feeling exactly! After becoming debt free, setting big long-term goals and starting to focus on building my wealth I had a much better feeling about my future, I was calm and determined.
To me, financial independence means having no debt (including my house) and being free to do whatever I want. I can’t wait for it!
Good luck on your journey!
That’s so true – Financial freedom is freedom of choice. Having to check the price tag before you buy puts you off and takes away the fun of living. While cutting corners is alright but if you see that happening for infinity, maybe you are guilty of a serious financial mistake. I was amazed to know daily trip to Starbucks can all add up to thousands of dollars a year!!!
I still think it helps to check the price tags, even if you are financially independent 🙂