Financial Independence vs Financial Freedom: What’s The Difference?
Financial Independence vs financial freedom. What do these terms mean and is there really a difference between the two? The answer, yes, there is a difference. While these two are pretty similar – and have been used interchangeably by plenty of people – they are quite different. Think of it like this, you have milestones in your life that make you a little bit more independent – like when you get your driver’s license. You now have the independence to go where you want on your own. But you don’t have complete freedom because you still may have a curfew with your parents. It isn’t until you are out on your own where you have the freedom to go out and stay out for as long as you want. That is where the major difference lays with financial independence and financial freedom.
What Is Financial Independence?
The driver’s license example can be taken and put into your finances. Financial independence is when you can maintain your current lifestyle without having to work. You are not tied down by any job and you don’t have to change your lifestyle. With financial independence, not only do you keep your current lifestyle, you stay in your current lifestyle. People that are financially independent obtain financial independence by living well below their means. They figure out their financial independence number and save as much as possible to get to that number. Financially independent people splurge on themselves every once in a while but know when to hold back so they don’t spend too much money unnecessarily.
What Are The Qualifications Of Financial Independence?
To be considered financially independent, there are a few qualifications you should meet.
- You reach your FI number: Your FI number takes your necessary spending plus your discretionary spending to get your total annual spending. Then, take your annual spending and multiply that by 25. That number is your financial independence goal.
- You use covered debt: This one isn’t necessary for financial independence, but it can help obtain it. This basically means you are using your debt to fund an investment. Take a selling a home and then using that money to pay off the rest of the mortgage.
- Make sure you have retirement savings: Making sure you set up your retirement savings while you are young makes sure you don’t have to rely on Social Security or a pension to live off your retired life.
- Make sure you have investment income: Investments will be a big part of how you will reach financial independence. For many, the cash they have coming in is in big part from the investments they made with their savings.
What Is Financial Freedom?
After financial independence comes financial freedom. Let’s go back to the driver’s license example. After you get your license, you want to drive everywhere, but you still have a curfew to maintain. It’s not until you move on your own that you have full freedom to make your own decisions. That’s financial freedom. You are completely free to do what you want when you want because you have the finances to back you up. Unlike financial independence, you don’t have to keep the same lifestyle you have now. If you want to splurge more on yourself, you can. Your retirement is what you want it to be. Whether that’s traveling or indulging on the latest technological devices, you are free to do whatever you want.
What Are The Qualifications Of Financial Freedom?
Just like financial independence, there are certain qualifications to be considered for financial freedom.
- You exceed your FI number: This means you take your necessary spending plus two times your discretionary spending to get your annual spending if you splurged a little more. Then, with the number you just got, times it by 25 and that will be your FF number.
- You have no debt: You are financially free once your debt is fully paid off. When you’ve paid off your debt in full, you are no longer held back and stressed about your mounting debt. You can finally relax.
- Have an emergency fund: You must be set with an emergency fund. When emergencies arise, you have to have the funds to deal with them. You are financially free when you can have three to six months’ worth of your expenses in your emergency fund.
- Your retirement savings are set up: You have a retirement fund that is sustainable enough to bolster your Social Security.
Wisconsin Auto Title Loans Can Help You
Despite their differences, it’s easy to see that reaching either financial independence or financial freedom takes a lot of planning and hard work. There is always something threatening your financial independence and freedom. When an unexpected emergency threatens to derail your progress, an online title loan from Wisconsin Auto Title Loans can be the answer. The process of getting an online title loan is very simple. In just thirty minutes, you could get the money you need and finally make your way toward either financial independence or even full financial freedom. Anywhere between $300 - $15,000 could be yours. Just fill out the online form to get started.
Note: The content provided in this article is only for informational purposes, and you should contact your financial advisor about your specific financial situation.