The essence of financial independence is that your passive income—usually generated through investments—is sufficient to sustain your lifestyle.
But how do we define “enough”? Enough for what exactly?
Many people instinctively quantify “enough” based on their current lifestyle. For example, a couple in their late twenties with a child might say, “We live in San Diego, our expenses are $5,000 a month, so once we have $5,000 in passive income, we’ll be financially independent (FI).”
However, this reasoning has significant flaws.
First, current living expenses are not static. With some effort and creativity, you could lower your monthly costs. Financial independence advocates embrace this idea. While your mortgage might be $2,500, there are countless ways to adjust—moving, renting out your property, or even downsizing to a tiny home or RV.
Additionally, your lifestyle preferences are likely to evolve. As time passes, you might find yourself drawn to upscale dining, luxury brands, or higher-end furnishings. The idea of settling for used furniture might start to feel outdated.
These scenarios illustrate that lifestyle inflation can be legitimate and isn’t inherently negative.
Consider that while you currently have one child, you may desire more in the future. How would that ambition reshape your understanding of “enough”?
The key takeaway here is that your standards for living can increase over time, and that change is completely natural.
Moreover, your expectations evolve as you age. Your living standards at 18 were different from those at 22, and again from 26. Adopting your current standards as the benchmark for financial independence represents a random choice based on recency bias, selecting just one point along your life’s journey.
In short, “standard of living” is a fluid measure. If we use it to define financial independence, then the concept itself becomes equally unstable.
Yet many still measure their financial progress in this way, saying things like:
- “I’ll be financially independent when my net worth reaches 25 times my annual expenses.”
- “I’ll achieve financial independence when my passive income equals my living costs.”
These statements tie financial independence to present living standards, which is problematic.
A more refined definition could be: Financial independence is reached when your passive income is sufficient to cover your essential needs.
This premise separates your expenses into two categories: needs and wants. Needs are fixed and non-negotiable; wants, however, can vary. It stands to reason that if your passive income can cover your needs, any engagement in paid work stems from desire rather than necessity.
However, even this definition has its shortcomings.
First, distinguishing between needs and wants is more complicated than it appears. Housing is undoubtedly a need, but the specifics of your mortgage or rent often reflect personal choices that veer into want territory. Similarly, while groceries are necessary, do you truly need that gourmet olive oil or impulse-buy item at the checkout?
What about residing in high-cost cities like San Francisco or New York? Is that truly a need? And what about the option to expatriate to a more affordable location, like Thailand or Colombia? Is that choice a need or a want? Would living in Guatemala mean you’re less financially independent than you would be by staying in the U.S.?
Second, your basic living costs will likely change over time due to several life events:
- Adding more children to your family.
- Navigating the transition of children into adulthood.
- Facing unexpected medical issues.
- Sudden shifts in health insurance costs.
- Major one-time expenses arising from college tuition, fertility treatments, or legal fees.
- Taking on caregiving roles for family members.
This raises an important question: Should you adjust your definition of basic costs each year? If “net worth = 25 times my spending” fluctuates, would it mean you could be financially independent one year but not the next?
Alternatively, should we just accept that measuring financial independence can be complex and subjective, relying on a feeling rather than a strict number?
I lean towards the latter.
I believe that financial independence is ultimately a feeling, not a figure.
It represents the art and science of having “enough.” To define financial independence, we must first evaluate our concept of enough. Unfortunately, there’s no standard measure for “enough.” Even the term “lean financial independence” lacks a clear yardstick. While we could use current circumstances to create a metric, today is just one moment in time—there’s no inherent reason for it to define your future.
Financial independence is not a destination we arrive at once. The narrative that states, “I was not financially independent, then I went on a journey, and now I am” is a misleading oversimplification.
Financial independence transcends numbers. It is not a portfolio balance or an exact figure; it is a mindset and a philosophy of living.
To better refine the definition of financial independence:
Financial independence is when your potential passive income, primarily from investments, is enough to empower you to make choices driven by hope and desire rather than fear or obligation.
Let’s break this down:
- “Financial independence is” — Quite straightforward.
- “the state in which” — This emphasizes that it is a condition of being.
- “your potential passive income”— The term “potential” is key here. There are those within the financial independence community who build substantial investment portfolios but choose to reinvest rather than draw from them. This distinction is crucial; financial independence provides choice, not obligation.
- “typically through investments”— I use “typically” as other passive income sources exist, such as royalties from creative work, yet investment avenues are the most prevalent.
- “is enough”— This is the crux of the matter.
- “to make decisions from a place of hope and desire rather than fear or obligation.” — The nuance here is essential. While having passive income may not eradicate your fears, it grants you the option to make choices based on desire instead of financial necessity.
Of course, we could simplify everything by saying, “financial independence is when your net worth equals 25 times your basic expenses.” This would indeed be easier.
But my gut tells me this concept stretches beyond mere numbers.
What are your thoughts?
Let me know if you’d like any adjustments or further details!