Financial Independence – defined? Not so much🤑

The traditional definition of financial independence is shown below. Today, that definition gets stretched a bit. Some people seeking extreme early retirement or simply a less stressful way of life claim to save for the FI goal … and achieving it … but in reality often depend on supplemental income from full or part-time employment or gig work.

Financial independence is the status of having enough income (from investments, passive businesses, real estate, etc.) to pay for one’s reasonable living expenses for the rest of one’s life without having to rely on formal employment.

Wikipedia

In reality they are not financially independent especially “the rest of one’s life part.” To be truly FI your assets must be substantial not only to meet today’s basic needs, but financial emergencies and most important, long-term inflation. The earlier in life one seeks to rely on passive income, the more difficult the task.

Let’s say your current household income is $50,000 per year. Using the 4% rule as a general guideline, you need at least $1,250,000 in assets to meet your income needs and even if you start your FI life with an emergency fund, your assets must generate the ability to replenish that fund without taking a lump sum from your investments.

But the 4% guideline may be out of date. Take a look at what The Motley Fool says.

So, a financially independent goal may be more difficult than it appears and what appears to be FI may not be what it seems. In any case, the key is building a steady income stream from various sources and types of investments.

One comment

  1. Thank you for responding to this question, Mr. Quinn. I agree with your definition and was surprised when other Frugalwoods readers suggested that my reader case study implied Squash and I already were financially independent. I hope we are well on our way, but we have a ways to go yet.

    Like

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