Financial Freedom vs Financial Independence. What’s the Difference?
When it comes to finances, you may have heard terms like financial freedom and financial independence, but what do those terms mean? Is there a difference? Many people will tell you that they mean the same thing, but there are some that believe they have a different meaning. Let’s take a look at how they may be different.
What Is Financial Freedom?
The definition of financial freedom means that an individual or family has enough savings, investments, and cash to afford the lifestyle one wants without being driven to earn a certain dollar amount each year.
When one has financial freedom, you will find that they are living a life that is absolutely debt-free, has an emergency fund (liquid savings) that can be used to cover any loss of income or unexpected expense. They will also have enough in retirement to supplement their social security and live the life they are accustomed to in comfort and without worry. Investing 15% of gross income in tax-sheltered or deferred accounts like an IRA or 401(k) is a general rule of thumb for anyone hoping to have financial freedom by the age of retirement or earlier, depending on when you begin saving.
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What Is Financial Independence?
The definition of financial independence means that an individual or family has enough income, in savings, investments, and cash to live the rest of one’s life without being employed or being dependent on another. The income earned without having to work is considered or referred to as passive income. When one is striving to be financially independent, one is working toward early retirement or working under their own terms.
A financially independent person may not have any debt like a person that has financial freedom, or they may have covered debt. Covered debt can be used to fund investments. This type of debt may help one to create more wealth. An example of this is the mortgage of a rental property that would cover the total debt if the property was sold. Covered debt may not define financial independence, but it can be used as a good way to obtain it. The more covered debt you have, the more potential income you have when that property is paid in full or sold. As for retirement, one that is financially independent will have enough in their IRA or 401(k) to retire without supplemental income from a pension or social security. That income may be considered an added bonus.
Financial Freedom vs Financial Independence
Whether you are financially free or financially independent, it is a great accomplishment. Reaching that level of security and financial health/wealth is what all people strive for, but only some are able to achieve. While each term refers to an individual that has the income needed to retire to a life that is comfortable and without worry, having financial independence is the ultimate goal. Financial independence will take you to another level. With it, you have the option to retire early, enjoy your life any way you want, and answer to no one. For most of us, it is a dream come true.
Note: The content provided in this article is only for informational purposes, and you should contact your financial advisor about your specific financial situation.