- As a financially independent person, although you are not working for pay, you might have to work to maintain that source of income.
- Aside from early retirement, the purpose of financial independence could vary for different people, be it pursuing their passion or taking up fulfilling roles such as social work, without worrying about monetary incentives.
- For all practical purposes, it is important to look at financial independence, not as an end-goal, but as a long-term effort and commitment, so that you’re prepared to make necessary changes when life demands so.
- Financial independence is a process that requires budgeting, meticulous planning, saving and investing diligently, and making significant lifestyle changes to have a sustainable future with the limited resources you have planned for.
- For individuals with family responsibilities, by carefully setting aside funds for your dependents, you still can get on the road to financial freedom.
Financial independence has become a buzzword in today’s day and age. Many equate it to having a job and paying for your expenses, that is, not being financially dependent on someone (e.g. partner, parents etc.). While it seems intuitive, this is a flawed perception which has led to the propagation of a number of myths.
If you look up the term “financial independence”, it is often defined as not having to work to meet one’s financial needs for the rest of one’s life. While this is technically sound, it is also too simplistic a definition given the complexities of financial planning and the even more complicated lives we live today. Being able to afford the luxuries of life without working at all or even actively investing and managing your wealth is often a privilege limited to a few that may have inheritances.
Does it then mean that most of us cannot be financially independent? Not at all. In this post, we debunk the most common myths around financial independence, unpack what it means and how it is a goal all of us can and should strive to attain.
Myth 1: Financial independence means you don’t have to work
Financial independence is about reaching a point where you no longer have to work for pay but it doesn’t always equate to not working at all. Your level of involvement is often contingent on your key source of income. For an income that comes completely from investments in financial instruments, it can be managed with little involvement, especially if the investments are automated as in the case of a robo advisor. However, if your income is derived from real estate, or a business managed by your employees, it may need a certain degree of involvement from your end. Although you are not working for pay, you might have to work to maintain that source of income.
Myth 2: Financial Independence means Retire Early
This myth is to be attributed to the FIRE (Financially Independent Retire Early) movement that has gained sudden popularity amongst the millennials. Although, being financially independent does help to plan towards an early retirement, it does not necessarily mean that financially independent people always intend to stop working and get done with their responsibilities. The purpose of financial independence could vary for different people, be it pursuing their passion or taking up fulfilling roles such as social work, without worrying about monetary incentives. So financial independence is not synonymous with an early retirement but rather with having the freedom of choice to do what you want to.
Myth 3: It is a one-time goal to be achieved
Although, the definition does mention that financial independence means having enough to sustain for the rest of your life, we know for a fact that life hardly goes as planned. It’ll be juvenile to assume that having it all charted out exempts us from the uncertainties of life. True, we can hedge against crises through emergency funds, insurance and liquid investments. Yet, major changes in life such as change in marital status (getting married or divorced), having children, or moving countries can derail the most robust plans. For all practical purposes, it is important to look at financial independence, not as an end-goal, but as a long-term effort and commitment, so that you’re prepared to make necessary changes when life demands so.
Myth 4: It needs very high income early in career
Yes, a high earning career is extremely useful when it comes to accumulating wealth and building passive income. However, a high income job may come with its own set of challenges such as long working hours, numerous business travels or relocations. In those cases, it may get even more challenging to plan for the future when all you want to do after getting back home is to crash. Financial independence is a process that requires budgeting, meticulous planning, saving and investing diligently, and making significant lifestyle changes to have a sustainable future with the limited resources you have planned for. Many young professionals with average income jobs have found time to do all of this and also took up second jobs to hasten the process. Do not be discouraged if your annual income is not above the market average. Instead, use your time wisely and productively to plan the future you have dreamt of.
Myth 5: It is not meant for those with family responsibilities
Being bombarded with social media posts about how someone quit their job to travel the world by becoming financially independent seems dreamy, but may not seem like a feasible option for many. Especially so, for those with family and other responsibilities who are thinking about securing their kids’ future or supporting their partner or parents. However, the ‘travel the world carefree’ image is not what financial independence is about. It is about being able to fulfil all your responsibilities, and sustain a lifestyle with the passive income you have planned for. By carefully setting aside funds for your dependents, you still can get on the road to financial freedom. It may take more time than someone that may not have the same responsibilities, but it will come if you commit to it.
Financial independence, like most things in life, is subjective. But that’s where the beauty lies. You get to choose what life you want and plan accordingly. All you need is someone to guide you through and the right resources to execute the plans. We will soon be coming up with a tool to help you chart out your entire financial future. In the meanwhile, do stay tuned for more posts on financial independence, its benefits and how to get there.