Financial independence is a hot topic in the personal finance community. Still, a lot of people have no idea what it is and why it matters. For many, financial independence changed their life, and it could do the same for you. So, check out the rest of this article, where I’ll share everything you need to know about the financial independence movement.
What is Financial Independence?
Financial independence means having enough passive income to offset your living expenses.
But, why only passive income? Because you’re not truly independent if you still need to work to pay your bills. Instead, you need to have passive income, which is income you receive whether or not you work for it.
Stock dividends and rent payments are common examples of passive income. Stock dividends are passive income because you receive money just for owning the stocks. You don’t do any work to receive that dividend. The same is true for rental income. As long as you have tenants in your rental property, the rent payments should keep coming.
Some people will argue about how to define passive income. Typically, a good dividend investor will do some research to decide which stock to invest in. Is that work? Maybe, but it’s not the same as a 9-5 job. The same is true for rental properties. Technically, you might need to find tenants and make the occasional repair. Is that truly passive? That’s up for debate.
I guess the definition of passive is in the eye of the beholder. But, most people will count dividends and rent checks as passive income.
Do you understand now why passive income, not regular income, defines financial independence? It’s because you can’t be truly independent financially if you still need to work to make ends meet. Having enough passive income to cover your expenses means you can choose to work or not to work. You are no longer dependent on a job to survive. You’re financially independent.
Financial independence is not about having a certain amount of money. You could have $1,000,000,000 in your bank account, but it’s worthless if it doesn’t make you more money. Although, if you have that much in your bank account, you’re probably earning some killer interest. Bank interest is another form of passive income.
Why does Financial Independence Matter?
Financial independence means never having to rely on your job to pay your bills. That’s huge! Instead, you have enough assets generating enough income to take care of all your needs. Finances are stressful for a lot of people because they’re always trying to make ends meet. Can you image if your ends just automatically met, whether your worked or not?
If you have financial independence and lose your job, there’s no need to panic. If you have financial independence and hate your job, you can quit without giving it another thought. Financial fears hold back most people, but not the financially independent. They can (literally) afford to take risks others can’t.
And, if you want to get ahead in life and pursue your dreams, you usually need to take risks. Financial independence gives you power you never had before. Not only will it reduce your stress, but it puts you in a powerful bargaining position. When you have the power to say no, more people will be inclined to give you whatever you want.
Do you deserve a raise your boss won’t give you? Threaten to quit, and mean it. Odds are, you can afford to leave, but they probably can’t afford to lose you.
Do you see a theme here? Basically, financial independence means not having to worry. Things may not always go the way you expect. That’s life. But, with financial independence, you’re in a better place to handle those issues.
How Do I Become Financially Independent?
There are two main ways to become financially independent. You can either increase your passive income or decrease your expenses. For most people, achieving financial independence requires both. And, both ways have their advantages and disadvantages, as you’ll see below.
Method #1: Increase Passive Income
Increasing passive income typically requires a lot of upfront work. You know the phrase, “It takes money to make money?” If you want dividend payments, you need to buy stocks. Those stocks cost money. If you want rent checks, you need to buy rental properties. Those properties cost money. Passive income is all about turning assets into income, and assets are rarely free.
This is why most people need a primary income before they can achieve a passive income. They need to earn the money to buy the assets that will then make them more money. Once you have a little passive income, you can combine it with your regular income. This will supercharge your asset purchases, which will lead to even more passive income.
Eventually, you’ll have enough passive income that you won’t even need your primary income. You can continue to work all you want, but it will be on your terms, and that’s important.
So, what kind of passive income should you have? Well, there are a lot of options to choose from! Below, I’ve provided a common list of passive income sources. They might not all be right for everyone, but I encourage you to check them out!
Common Sources of Passive Income
- Stock dividends
- Bond payments
- Rent payments
- Peer-to-peer lending
- High-yield savings accounts
- Book royalties
- Affiliate marketing
- Starting an online store with drop shipping
- Creating/selling online courses
- Starting a business, paying someone else to run it
- Licensing your photos
- Renting out your space
- Renting out your stuff
In fact, the more sources of passive income you have, the better! Having multiple income streams can be just as important as being financially independent. If you lose one stream, you still have others. This kind of financial flexibility is critical to staying afloat, especially during hard times. “Never put all your eggs (or income) in one basket,” they say.
Method #2: Reduce Expenses
Reducing your expenses is the second way to help become financially independent. The fewer expenses you have, the less passive income you need to offset them. But, for a lot of people, reducing expenses can be a touchy subject.
After all, personal finance can get pretty personal. But, if you want to achieve financial independence, try leaving your ego and expectations at the door. Don’t think you need everything the Jones have. You don’t, and the Jones will probably never have financial independence anyway.
Some expenses are unavoidable, but if you look hard, you can almost always find something you don’t need. What are you willing to give up for financial independence? If nothing, that’s fine! Boost your passive income. But, if you want to learn how to cut a few expenses, check out the list below.
Common Ways to Reduce Expenses
- Pay off your loans
- Refinance your loans
- Carpool to work
- Install energy-efficient appliances
- Cancel club memberships
- Cut your cable bill
- Cancel newspaper/magazine subscriptions
- Prepare your lunches at home
- Shop around for home and auto insurance
- Raise your insurance deductibles
- Get a cheaper cell phone plan
- Cut expensive habits (smoking, alcohol, etc.)
- Move to a cheaper place to live
These are just a few of many ways to reduce expenses, and they might not all be right for everyone. That’s fine. But, see if you can find a couple that could work for you. Typically, the more you simplify your life, the fewer expenses you have. Financial independence doesn’t mean surrendering all worldly possessions, but a few simple reductions can make a huge difference.
Financial independence means having enough passive income to offset all of your expenses. If you want to achieve financial independence, you can either increase your passive income or decrease your expenses. You can increase your passive income by purchasing assets that generate income, like stock dividends. You can decrease your expenses by cutting things from your life you don’t really need. The more sources of passive income you have, the better. By becoming financially independent, you become empowered to take more control over your life. Plus, financial independence helps eliminate stress caused by finances. Ultimately, financial independence can help give you freedom to do what you’ve always wanted to do, without worrying about money!
What do you think about financial independence? Do you have financial independence? Do you know anyone who is? Let me know your thoughts in the comments below!