There are many definitions of financial independence around the web. Some define financial independence as being on your own without the support of family and having a job that covers your expenses.
In the world of early retirement, I define financial independence as having enough passive income to cover your needs. If I was to leave my job, I would be able to cut back my discretionary expenses so that my income only covers my needs. Needs are defined as all expenses required to live life simply. This might mean that you need to cut back on luxuries such as cable, new clothing, and restaurant outings.
Some people strive to be financially independent in order to have their own FU fund in case they want to quit work. Others want to be financially independent in order to no longer work full time and supplement their wants with a part time job or side business. I want to be financially independent in order to pursue my own start-ups without risking my family’s financial security.
Wants can be significant for an early retiree. You need an allowance to have fun, maintain hobbies and fund unexpected expenses. There might also be investment opportunities where you will want extra cash flow to fund these. Another want can be aggressive mortgage repayment.
By definition, I have reached financial independence since my passive income can cover my family’s needs. Our needs include food, internet, insurance, car expenses, home mortgage and household expenses. I am however not able to cover my family’s realistic wants with our passive income. Our wants include motorcycle maintenance, discretionary spending which covers social event and gifts, renos, maintenance and mortgage over-payment (to pay off mortgage in 5 years).
How do you define financial independence and how close are you to achieving it?