Financial Freedom vs Financial Independence

In my research for this blog, I stumbled across a rather scary group of people called the ‘internet retirement police’ that threaten to derail my Millennial Mutiny before it has even started.

The internet retirement police apparently go around telling people that they are not doing early retirement 'correctly' or that they are not in fact financially independent, all while probably hiding behind some anonymous avatar online. 

I have to thank Mr. Money Mustache for warning me of this imposing menace. The good news is that you don’t have to pay a blind bit of notice to them.

You see, the wonderful thing about your Financial Freedom goals are that they are yours and yours alone. It’s your life, which means you get to decide how to live it and what you want to do. 

Are They Just Jealous?

The Internet Retirement Police (and indeed many of your friends and family) might well have an opinion when you tell them that you are on a Journey to find Financial Freedom and perhaps ‘retire’ early.

They could well say that you are crazy or that it will never work, they might think you are deluded.

All of this is … totally normal!

Non-FIRE (Financial Independence, Retire Early) people probably won’t understand, but that’s ok. They can carry on working 60 hour weeks just to make the rent while you head peacefully towards Financial Freedom.

With all of this said, in order to make my goals clear (and to perhaps avoid the rath of the internet retirement police), I am going to set out my goals and my definitions of Financial Freedom and Financial Independence here for all to see.

Financial Freedom and Financial Independence will mean different things to different people. I believe that Financial Independence comes before Financial Freedom.

Before either of these things though, comes Cashflow Independence.

Cashflow Independence

I believe Cashflow Independence happens when your income from entrepreneurial projects, side hustles or investment income is enough to cover your current monthly expenses.

Basically it means that you are not reliant on anyone else to cover your monthly costs.

Notice that there is still some work to be done here if you are running a business or a side hustle, but that work is either wholly owned or controlled by you.

I am now at the point where I have reached Cashflow Independence. The income from my Financial Planning business, investment portfolio and side hustles is more than enough to cover my monthly bills and expenses and give me a great life.

I am also able to maintain a fairly high savings rate of around 30% (although my goal is to get this up to 50% or more by the end of 2020).

Sounds Great - Can't We Just Stop There?

For some people, this will actually be enough. If you love the job you are doing and you don’t want to give it up, there is perhaps no need to go any further.

For most of us though, the prospect of Financial Independence and then Financial Freedom is tantalising enough to make us keep going.

The only issue with Cashflow Independence is that it is still reliant on some factors slightly out of our control.

Our business might take a dive, our side hustle website might lose all of its traffic because Facebook changes their algorithm or perhaps we might get sick and be unable to work.

For these reasons, I believe Financial Independence is the next phase to reach for.

Financial Independence

I define Financial Independence as being in a position where the income (not capital growth) from your investment portfolio (I include property rentals here as well) is enough to cover all of your bills and expenses each month.

At this point, work becomes a choice. You can do whatever you like with your business and side hustles and your investment income will still cover everything. You don’t NEED to work, but you may well want to if you love what you do.

Now even Financial Independence seems to have different definitions depending on where you look.

Some people say that you are Financially Independent when your investment income covers all of your vital expenses (rent / mortgage, food, utilities, insurance etc) and this is a fair enough definition.

I suppose at this point the theory is that you could quit your job and survive on your investment income, but it really would be just surviving.

My preferred definition however is where your income from your investments covers your current lifestyle. This means you can carry on doing exactly what you have been doing and still not have to work.

The Real Destination - Financial Freedom

The final destination on the Journey is Financial Freedom. In my mind, this is where your investment income is enough to let you live the life you really want to live without having to hold back.

When you have worked out how much you would like to spend in your dream life (use my FREE planner to work this out), you can use the achingly simple 4% rule to figure out how much your portfolio needs to be worth to cover this.

The 4% rule basically says that you can draw 4% out of your portfolio for life and have a fairly low risk of running out of money.

So, for example, if you want to spend $40,000 per year in your dream life, divide this by 4% and you will find you need a total portfolio of $1,000,000. I call this number your Freedom Figure.

If you want to travel the world, include that in your Freedom Figure, if you want to fly first class, that needs to go in too. If you like to eat out 5 times a week, you guessed it – add that to the list.

For me Financial Freedom is the true mecca. This is the place where you can live your dream life, work is always a choice and you basically never have to worry about money again.

So Where Am I Heading?

For me, I have worked out that my dream life will cost $96,000 per year. This means that I need a portfolio of $2,400,000, according to the 4% rule.

Add in an extra £100k for good measure (you never know) and this gets us to $2.5 million.

That’s my goal for true Financial Freedom. 

So, just to be clear with my objectives:

1. I currently have NO desire to ‘retire’ from my Financial Planning business. I built it with my bare hands, I have nurtured it through good times and bad and I LOVE the work I do. Why would I stop?

2. What I do want to do is achieve Financial Independence and then Financial Freedom.

3. I want to build my investment portfolio so that it ‘could’ support my current lifestyle and then, I want to build it even further so that it could support my dream lifestyle.

That, to me anyway, is Financial Freedom.

So there we have it. Hopefully the internet retirement police will let me off the hook now.