Financial Independence Definition

To achieve the American Dream in today’s volatile economic climate, a person must understand financial independence and take action toward reaching it. But becoming financially independent is difficult unless we can agree on the financial independence definition. This article first presents the definition the National Financial Educators Council (NFEC) offers. Then we’ll review some other definitions and discuss practical action steps that allow people to truly reach “financial independence.”

NFEC Definition of Financial Independence

The NFEC starts by looking at the meaning of “independence”: Freedom from being dependent and from outside control.

Then they extend that definition to include finances. Thus:

“Financial independence”: Freedom from dependence on anyone else to meet your financial needs. Self-sufficiency and capability to weather financial setbacks while planning toward a secure future.

We first developed our definition of financial literacy to guide our curriculum development team. Since then it has taken on a life of its own. Our financial literacy definition has been quoted by numerous publications and currently is Google’s Featured Snippet (meaning it was selected as the highest-rated definition over all others by Google algorithms). Your contribution is valued and appreciated.

Definitions of Financial Illiteracy from Organizations

  • Wikipedia: Financial independence means you have enough wealth to live on, without working.
  • Financial Samurai: Financial independence meets the following criteria: 1) No need to work for a living; 2) Net worth is equal to or greater than the number of years left in your life X living expenses.
  • Retire by 40 Blog: Financial independence means you can do whatever you want without having to worry about money.
  • Cashkeen.com: An economic position reached by an individual (or a household) where said individual does not depend on income from an employer and/or traditional employment.
  • My Millennial Guide: A financially independent person can control their time on his or her own terms. They can do whatever they want to do in their day to day life. These kinds of people are passionate about what they do and how they are spending their time. They feel excited when they begin working on their project early in the morning.
  • NerdWallet: The original meaning of financial independence referred to kids who moved out of the family home. The idea is that you can now make enough money to get your own place and pay all of your own bills without relying on the support of family and friends.

Other Details about Financial Independence

Clearly, the financial independence definition varies depending on your life stage and perspective. And as the results of this survey show, although most Americans still believe they can reach financial independence, some have given up hope.

But there is hope, and the place to start is becoming more knowledgeable about money management. The process for reaching financial independence can be the same regardless of how you define the term. Becoming self-sufficient and free from anyone else’s control over your money requires two simple steps: generate more income than expenses, and follow a solid, strategic savings plan.

Expenses: Take steps to reduce your expenses. Take a good, hard look at where your money goes each month. Chances are there are ways you could minimize those expenditures. Sort them into categories: 1) fixed expenses, like rent and car payments; 2) variable expenses, like groceries and personal care items; and 3) periodic expenses, like auto registration and annual subscriptions.

How could you pay less? Maybe you could cut down on eating out, or cancel a gym membership you never use. Move to a less expensive home/apartment, or try negotiating with your landlord for lower rent. Are you a homeowner? Look into refinancing your mortgage to adjust the payment. Invest in a car that gets better gas mileage, go electric – it’s the current trend – or take public transportation. Find a good tax accountant to help you reduce your tax liability. These are just suggestions – explore your own situation in-depth to illuminate ways you can cut back.

Income: Take a look at your income. Financially independent people do not live paycheck-to-paycheck. Getting free from that cycle means freeing yourself from dependence on a single job for your income. Across the long term, increasing income requires engaging in lifelong learning, staying abreast of changes in technology and the job market, and keeping your skill sets up-to-date. Find out which skills are most sought after by employers, and avoid work that’s likely to be automated in the future.

To make sure you’re earning what you’re worth, compare your salary package with what other people in your field are earning – those in your position who have the same skills. If it’s warranted, use the data you gather to negotiate a raise. Or pursue a higher-paid position with another company.

Side hustles are becoming increasingly common these days. You can pick up some extra income by taking a second job part-time, starting your own business, or doing independent contract or freelance work. Finally, create passive income streams by learning about and preparing to invest. You have multiple investment options: retirement accounts, the stock market, bonds, real estate, mutual funds/ETFs, and annuities. Do your research and choose investment vehicles that work best for you.

Savings Plan: Savings forms the basis of your long-term financial plan and it’s the key to financial independence. When you develop your budget, make it a priority to pay yourself first by putting a designated amount into savings before you pay bills or anything else. The earlier you start, the better your chances of reaching financial independence in the future.

Consider the three parts of a sound savings plan: your emergency fund, short-term savings, and long-term savings. Set up the emergency fund first – it should represent six months’ worth of your expenses – and use it to cover emergencies like a job layoff or surprise car repairs. In your short-term savings, put money for fun events like vacations and attending sporting events or concerts. Long-term savings is the account you’ll use for investments in your future, so you can generate the passive income streams discussed above.

The American Dream is still alive. Anyone can reach financial independence if they make customized plans aligned with their goals and needs, and then stick with their plans across the long-term.