You have financial goals, but did you know there’s a big difference between financial freedom vs. financial independence? While both require you to save money, they have different lifestyles and outcomes.
Which comes first, and which should you focus on? Keep reading to find out more.
Table of Contents
Financial Freedom vs. Financial Independence
Financial freedom and financial independence sound similar, but they have different meanings.
While both put you on the path to financial peace of mind and teach you how to be financially stable, you can achieve different things within each financial status.
Both are good goals and mean you’ve achieved a certain level of financial success.
The key is understanding the difference between financial freedom vs. financial independence and determining how far you want to take your financial success.
Within financial independence and financial freedom, there is one major similarity.
You have enough money and passive income to cover your expenses and live your current lifestyle. You aren’t dependent on a paycheck; you are financially secure.
Now, the differences.
Financial independence means you have adequate passive income and assets to cover the necessities and your basic lifestyle.
On the other hand, financial freedom allows you to make any choices you want without worrying that you’re cutting into the funds to cover your basic living expenses.
What Is Financial Freedom?
So, what is financial freedom, and how do you achieve it?
Financial freedom means something different for everyone. One couple may define it as the ability to travel the world during retirement.
Another may define it as being able to retire at 35 and not worry about working another day in their lives.
Yet, another may think they reach financial freedom when they can quit their 9 to 5 and pursue their business dreams.
Characteristics and Key Aspects
Everyone has a different picture of financial freedom, but in general, here’s what to consider.
- Dependable income: To be financially free, you must have a reliable income, in this case, passive income streams. Knowing you have enough passive income and assets for the foreseeable future allows you to pursue your dreams.
- Adequate savings and assets: Income generated is important, but having savings and assets is even more important when trying to reach financial freedom.
- Stocked emergency fund: An emergency fund is even more important when you want to be financially free and not dependent on your job. An emergency fund covers unexpected costs you didn’t include in your annual expenses without depleting your retirement savings.
- No debt: Debt depletes assets and your ability to live free. To be financially free, you shouldn’t have any debt, especially credit card debt or personal loans, but you should consider paying off your mortgage, too.
How Much Do We Need To Achieve Financial Freedom?
No two people have the same needs for financial freedom. However, a good rule of thumb is the 4% rule.
With this rule, you withdraw 4% of your investments annually, which you use for living expenses and fulfilling your life’s dreams.
So how much do you need?
It depends on your goals. For example, if you want to travel the world, you’ll need much more money than someone who plans to stay put and live a basic lifestyle.
Remember to adjust for inflation annually, too. Sticking to a 4% withdrawal rate will leave you with significantly less spending money during periods of high inflation.
Benefits of Achieving Financial Freedom
Financial freedom has many benefits, including the following:
- Freedom to do what you want: When you’re financially free, you don’t have to give in to the pressures of a 9 to 5 job or overlook your hopes and dreams because you’re stuck working. You can pursue your wildest dreams and enjoy life.
- Career choices: If your version of feeling financially free means pursuing a career that may not pay as much as your original career or starting your own business, this can be a tremendous benefit. You can do what you love versus what’s necessary to live life.
- Healthier mindset: Not worrying about finances can reduce stress and make living life much easier. You don’t have to worry about making ends meet, getting out of debt, or making hard financial decisions.
- Build generational wealth: If it’s your life’s dream to set your family up for financial success, building abundant wealth is the key. While you must still teach younger generations proper financial management, you can set them up for true financial freedom by creating generational wealth.
The 7 Levels of Financial Freedom
Financial freedom doesn’t happen overnight. It doesn’t happen in a few months, either.
It takes time, and understanding the seven levels of financial freedom can help you work your way through it and reach your financial goals.
To reach financial freedom, you must have goals, a plan, and a way to track your progress. It’s not as hard as it seems, as long as you start from the beginning of the seven levels of financial freedom and work your way to the top.
What Does Life Look Like When You’re Financially Free?
Your definition of financially free may be different than someone else’s.
In general, it means you are free to do what you want. You can carry out your financial dreams without worrying about what you must give up or how you’ll make ends meet.
How Is Financial Freedom Measured?
You can measure financial freedom by how long you can cover your bills, living expenses, and funds to achieve your financial dreams.
Compare that to how long you’ll be retired or without active income to determine if you’re truly financially free.
What Is Financial Independence?
Financial independence is similar to financial freedom but is a stepping stone to it. Financial freedom is the epitome of having complete control of your financial life. You’re no longer living paycheck to paycheck and feel financially secure.
Here’s what you must know about how to be financially independent.
Characteristics and Key Aspects
Financial independence is a little easier to measure than financial freedom because it’s based on your living expenses.
When you’re financially independent, you can cover the bills and other costs of living with passive income and assets.
Here are the most common characteristics:
- Passive income: You have enough passive income to cover your bills and other necessities. This doesn’t include money to fulfill your wildest dreams, but you have enough passive income to ensure you don’t rely on your job.
- Little to no debt: To be financially independent, you shouldn’t have large amounts of debt. You may still have a mortgage, for example, but don’t carry high amounts of credit card or other debt that depletes your assets.
- Flexibility with income-earning: You may not be tied to your 9 to 5 job when you’re financially independent. You can pursue other careers or income-earning opportunities while enjoying life more than when you had to work a specific career.
How Much Money To Be Financially Independent?
Like financial independence, everyone has a different amount of money to be financially independent. It depends greatly on the cost of your living expenses.
For example, someone with a significant mortgage will need more money to feel financially free than someone with fewer debts.
The same is true of your lifestyle; someone with a more extensive lifestyle will need more money saved than someone with a basic lifestyle.
Benefits of Achieving Financial Independence
Why become financially independent? Here are just a few benefits:
- Saving money: When you’re financially independent, you have enough money to handle whatever life throws your way. You don’t have to stress about financial issues or how to make ends meet.
- Meet financial goals: When you’re financially independent, you can set financial goals and reach them more easily because you don’t have to worry about where you’re getting the money to pay your bills.
- Better credit: To build a better future, you need good credit. If you don’t have a lot of debt and don’t have to worry about where you’re getting money for your basic living expenses, you can build good credit and a solid future.
- Peace of mind: Money stress is mentally exhausting, but when you achieve financial independence, you don’t have to worry about it as much and can enjoy life to the fullest.
Pillars of Financial Independence
To achieve financial independence, you must understand the pillars of financial independence, including:
- Purpose: Consider your ‘why’ or the reason you want to be financially independent. This will keep you going as you make tough decisions to save versus spend or to cut back on certain expenses.
- People: You are who you surround yourself with, so if you want to retire early, get out of debt, or reach other financial goals, surround yourself with people with the same ideal lifestyle and goals.
- Financial management: Financial freedom starts when you learn how to handle your finances to focus on the future versus instant gratification. Financial independence is a stepping stone for financial freedom, so learning to manage your personal finances is the key.
What Does Life Look Like Once You Reach Financial Independence?
Life looks different for every person when they reach financial independence. Some may quit their jobs and live a frugal lifestyle. Others may start a business and fulfill the dreams they once thought would never come true.
The key is to visualize what you want your life to look like and then crunch the numbers to ensure it happens. Include short and long-term goals, especially if you plan to retire early.
How To Calculate Your Financial Independence Number
Calculating your financial independence number means understanding many factors, such as your current income, annual savings rate, employer match, net worth, and expected pay increases.
You should also consider factors such as the inflation rate, your desired withdrawal rate (such as 4%), and the percent of your current income you’ll need in retirement.
Remember, when calculating your financial independence number, you’ll likely live a different lifestyle in retirement.
This could be a more extravagant lifestyle that requires financial freedom vs. financial independence or a frugal lifestyle that allows you to retire early while being financially independent.
Is It Possible To Be Financially Free but Not Financially Independent?
You can be financially free but not financially independent. It all comes down to your lifestyle.
For example, you may live so extravagantly that your living expenses require you to rely on more than passive income.
You may still need to work but have the FREEDOM to choose where and when. For example, you may own a business and work just as many hours, but you’re doing what you love versus what someone tells you to do.
How Long Does It Typically Take To Attain Financial Independence?
Every person works at a different pace when achieving financial independence. The earlier you start, the easier it is to achieve it, but that’s only if you follow your own strict rules.
Saving more than you spend is the key to reaching your goals, but it also depends on your investment portfolio, risk tolerance, and the types of passive income you earn.
Is Financial Independence Only for Retirement, or Can It Be Achieved at a Younger Age?
You can achieve financial independence at any age, whether 25 or 65. There aren’t rules stating you must be a specific age to reach it.
The earlier you focus on the FIRE movement, the earlier you’ll reach your goals, which may mean a much earlier retirement for you.
What Is the Average Age To Get Financial Freedom?
Financial freedom doesn’t have a set age you must reach. It depends on your financial habits.
Pew Research found that millennials greatly lag behind their predecessors when becoming financially independent from their parents.
This makes the age at which young adults today reach financial freedom much higher, but that doesn’t mean it’s unattainable even at a young age.
Can Someone Pursue Financial Independence While Still Working?
Pursuing financial independence is the best way to go about it. You start achieving your financial goals with the peace of mind of active income coming in should anything happen. It’s like a safety net. You get to try the new lifestyle without giving up your income yet.
How Does Achieving Financial Freedom Benefit Individuals?
Achieved financial freedom creates an entirely new mindset. You can do what you want (within reason) and don’t have the stress of a 9 to 5 breathing down your neck.
You can live life how you intended and make a difference in areas you care about without worrying that your finances will suffer.
What Are the Main Strategies for Achieving Financial Freedom?
The key to achieving financial freedom is starting early, having a plan, reassessing your plan often, and tracking your progress. It sounds like a lot of work, but it’s worth it when you have enough money in your retirement accounts to live life the way you want.
Are There Any Potential Challenges To Watch Out for When Pursuing Financial Freedom or Financial Independence?
There are always hiccups when trying to achieve total financial freedom or financial independence.
The key is to prepare yourself with a fully funded emergency fund and a plan should things change. Think of the worst-case scenarios, such as a recession, health scare, or other major emergencies that could throw your progress off course.
Financial Freedom vs. Financial Independence: Which Are You?
Understanding financial freedom vs financial independence is the key to reaching your financial goals.
It starts with financial independence, and then you can work up to financial freedom. Either way, you are on the path of more freedom and less money needed to live your life as you dreamed.
Samantha Hawrylack is a personal finance expert and full-time entrepreneur with a passion for writing and SEO. She holds a Bachelor’s in Finance and Master’s in Business Administration and previously worked for Vanguard, where she held Series 7 and 63 licenses. Her work has been featured in publications like Grow, MSN, CNBC, Ladders, Rocket Mortgage, Quicken Loans, Clever Girl Finance, Credit Donkey, Crediful, Investing Answers, Well Kept Wallet, AllCards, Mama and Money, and Concreit, among others. She writes in personal finance, real estate, credit, entrepreneurship, credit card, student loan, mortgage, personal loan, insurance, debt management, business, productivity, and career niches.