Most of us think we’re financially independent when we’re no longer relying on our parents for income. But as employees, we’re still relying on our employers – to stay in business, to keep us employed, to pay us on time.
Books and blogs on ‘financial independence’ tend to define the word in various ways. Zelinski, author of The Joy of Not Working, defines financial independence as simply the ability to live within one’s means. That is, if you earn $500 and spend $499, you are financially independent by Zelinski’s criteria.
I tend to favour the Your Money or Your Life version – that ‘where monthly investment income crosses above monthly expenses, you will be financially independent’.
Financial independence can be viewed as a continuum – with full dependence on others at one end, and all expenses covered by investment income at the other:
You may inhabit different places on this continuum at different points in your life, or you may find that one particular range is more suitable for you. Some people, through circumstances beyond their control, may need to rely wholly or partially on others (if you’re really pedantic, all economic activity involves some kind of reliance on other people – on your parents, on your boss, on customers, on the government, on charities, on your tenants, on the people who work for the companies you invest in, on your employees…). But recognising who we are dependent upon helps us to see where there may be any weaknesses that we can protect against. Do we need income protection insurance, for example? Would a part-time job be useful?
Do I really need Financial Independence? What if it’s beyond me?
Some may find striving for full financial independence prohibitively difficult given their life stage, income, or other circumstances, but may find a lot of value in diversifying their investments to have a bit of extra cash and a safety net in case their primary source of income comes under threat.
You don’t necessarily have to aim for the end of the scale from the outset, although most people generally do, even if they’re not aware of it. Superannuation funds and pensions are, as a rule, invested in diversified investments to provide income when you no longer work. ‘
The only difference is, when do you want your independence?
Now, or when you’re 60+?
Regardless of your current circumstances, the basic idea is that almost everyone can inch their way along this scale, diversifying their income and decreasing reliance on a single source.
As award-winning financial planner Venita Van Caspel-Harris said in her interview with Kathleen Gurney, author of Your Money Personality, ‘You just have to figure out two points, where you are and where you want to go. It’s like navigation. When you know the two points, it’s not too hard… Anybody can become financially independent, if you have the ability to earn, a little discipline to save, sufficient time, and reasonable intelligence’.
Where do you fall on the financial independence scale? And where do you aim to be?
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