Financial Independence

Financial independence is the state of having sufficient personal wealth to live, without having to work actively for basic necessities.

For financially independent people, their assets generate income and/or cash flow from dipping into the assets that is at least as great as their expenses.

For example, a person’s monthly expenses may total $4,000. They receive dividends from income they have previously developed for them self and/or with others totaling $5,000 monthly, while also having more money in other assets.

Under these circumstances, a person is financially independent.

A person’s assets and liabilities are an important factor in determining if they have achieved financial independence.

An asset is anything of value that can be liquidated if a person has debt, whereas a liability is related to debt, in that it is the responsibility of one possessing it to provide compensation. (Homes and automobiles with no liens or mortgages are common assets.)

It does not matter how old or young someone is or how much money they have or make. If they can generate enough money to meet their needs from sources other than their primary occupation, then they have achieved financial independence.

Age is potentially irrelevant with respect to financial independence. If they are 25 years old and their expenses are only $1,000 per month and they have assets that generate $1,001 or more per month, they have achieved financial independence, and they are now free to do things that they enjoy without having to worry as much.

If, on the other hand, they are 50 years old and earn a million dollars a month but still have expenses above a million dollars a month, then they are not financially independent because they still have to generate the difference each month just to stay even.

However, this needs to take into consideration the effects of inflation. If a person needs $1,000/month for living expenses today, that figure will be $1,050/month next year and $1,100.25/month in the following year to support the same lifestyle assuming a 5% annual inflation rate.

Therefore, if the person in the above example obtains their passive income from a perpetuity, there will be a time when they lose their financial independence because of inflation.

Today’s Chamber, LLC – M. Kameron Hawkins Founder & Chairman (2008)