I’ve been reading finance books again and this question has come up many times during these reading sessions. It has also spawned more questions that I’ve become more comfortable with answering as I track my spending habits.
What is financial independence to me?
When would I feel financially independent?
Those are not the only questions I came up with, but those are the ones I’ll be addressing in this post.
So, here goes nothing!
What is financial independence to me?
When I think about financial independence, my first thought is someone who can support themselves without the assistance of others. That is the literal meaning to me.
If I dig deeper, financial independence is:
- Having more assets than liabilities
- Maintaining a comfortable lifestyle without going into debt for it (paying cash whenever possible)
- Living below my means and above my needs
- Always having enough
I picked those four points because I have seen what living above your means looks like. I have lived above my means for most of my life in the name of confirmation. I could care less about that now. From time to time, I do envy those Pinterest home decor photos, but I know that’s someone else’s lifestyle. Below, I break down these points even more.
More Assets than Liabilities
If I have more assets than liabilities, I would have no consumer debt, no mortgage, no car payments, no past due bills, nor student loans. I could put all of my money towards savings or spending, not debt repayment. I would not owe anyone anything!
I would ideally like to have my retirement accounts fully funded and have an emergency fund that would pay for our expenses for two years.
I would be able to not work for two years and be fine. No going into debt, no worrying about bills, no waking up and dragging my kids out the house in 3°F weather because I have to go to work.
Maintaining a Comfortable Lifestyle Without Debt
This is the most important bullet point for me so far. To be able to go on vacation from my savings without needing to use credit is a dream come true. I know plenty of people do this and I have as well, but I’ve missed that money later on when I needed things like new shoes. I want to be able to create a comfortable lifestyle for my family and not feel regret about my spending.
I guess this is more about responsible spending than anything.
So, I want to spend responsibly and thoughtfully without going into debt to do so. If my washer breaks, I want to pay someone to fix it without checking my account balance or worrying about what won’t get paid or purchased because of that.
I need to want to save more than I want to consume.
Living Above My Needs, But Below My Means
This simply means I need to spend less than I earn. Simple to write about, difficult to do. For now. I feel like I need to catch up on basic needs, which requires a lot of front loading (spending a lot now). I am just becoming able to afford the basics for my family – diapers, wipes, transportation, medication, etc. So I spend just about what I earn each month, sometimes more. But, now that I’ve been in the workforce steadily for almost a year, I have put the basics in place.
Over the past year, I…
- Purchased a washer and dryer (eliminated my need for a laundromat each week)
- Repaired plumbing in the basement
- Repaired electrical issues and installed new outlets
- Bought quality clothing and shoes that didn’t fall apart within a few wears
These are things many people take for granted, but I have paid in cash and did not go into debt to do these things. Did I have money left over afterwards? No. But these were often one-time purchases, so the front-loaded costs will save me money in the long run.
To live below my means, I would have to earn enough to break even after buying the basics. Right now, that isn’t possible. It will be in the future, but right now, I will tread water until I can swim gracefully.
Always having enough
To always have enough is something I have dreamed of. I grew up in a lower-middle class household. We could afford the basics and save a little, but a series of deaths and misfortunes put us deep into debt. We have very little help getting back on our feet, so the last 12+ years of my life have been spent trying to get back to having enough.
I’m at a point now where I have enough, but that’s because I work and receive benefits from the state. It helps to make ends meet, especially since I am interning after graduating back in June. Most people won’t admit they accept government benefits, but I do. My family needs it while I get on my feet.
You can wag your finger at me, but the point is, the assistance is there for those who need it temporarily and I need it temporarily. I still submit all my pay stubs and any income I earn, taxed or not, so they can adjust my benefits. I am still at poverty level, even with the assistance.
There are still times when I have to borrow money because the assistance is not enough, but we make due.
This is why always having enough is important to me.
I never want to need assistance again.
To be self-reliant and financially independent is to be free.
When Will I Feel Financially Independent?
I’ve answered this question in my examples above, but I still think I should make a realistic list of my requirements for feeling secure financially, so I did.
I would feel financially independent when…
- My bills are paid each month, in full, and on-time
- I can help others financially without worrying about needing the money I gave away
- I can choose to how much I want to work or if I want to work at all because my assets can cover my expenses
- I am able to cover all of my needs and those of my family, with more than enough left over (abundance) for wants
- My retirement accounts are fully funded
- I am able to afford what matters to me and my family
- I have no consumer debt
I feel like this is a great list of things to aspire to.
I think that looking at this list will help me when I’m deciding to be frivolous with my cash.