What Is Financial Independence?

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If you’ve been browsing through personal finance blogs you may have found the phrase ‘financial independence’ crop up a lot. But what is financial independence and how does someone become financially free?

Financial Independence In a Nutshell

Financial independence is having enough wealth that you can sustain your lifestyle indefinitely without needing to work. It essentially allows you to retire early.

This independence is achieved through accumulating assets that generate an income higher than your expenses.

Examples of such assets include:

  • Bank account savings
  • Stocks and shares
  • Pensions
  • Rental property (including renting a single room)
  • Other reliable sources of passive income

The amount needed is directly related to how much you need to live on. This means you could be financially independent on an income of £25 a week if your expenses were £24. On the flipside if you received £2500 a week but had expenses of £2501 you wouldn’t be.

There are therefore two key areas of focus when striving for financial independence: increasing your assets and reducing your expenses.

How Much Money Do l Need to Retire Early?

Mr Money Mustache advocates multiplying your annual expenses by 25 to calculate how much you would need in order to be financially independent. So if you had expenses of £14,000 you would need to build up a savings pot of £350,000. You could then withdraw upto 4% of the balance each year to live on and the remainder would continue to grow, sustaining you indefinitely.

Such a large sum may seem impossibly high, but the joy is that it’s complete unique to you. So if you can live happily on less you’ll need a much smaller savings pot. With UK retirement ages set for further increases its worth taking your first steps to financial independence now, even if it just gives you the freedom to swap the 9-5 for part-time work in future. By starting early you’ll also allow compound interest to give you a helping hand along the way.

The Networthify calculator helps to demonstrate that financial independence isn’t such a far flung dream. Simply enter your take home pay (the amount you receive after tax) and play around with the inputs. You’ll quickly spot that small increases to your saving rate can allow you to retire years earlier.

The chart below uses these calculations to demonstrate the impact an increase in saving rate can have. Keen to retire in under 22 years? Analyse your spending and adjust your lifestyle to save 40% of your take home pay.

Graph depicting the number of years to achieve financial freedom with different saving rates

What If I Don’t Want to Retire Early?

Financial independence doesn’t mean you need to sit around on a beach drinking cocktails (unless you want to!). Instead it’s about buying yourself the freedom to choose how to spend your time.

So if you want to keep working you can, but crucially it’s your choice. Having financial freedom can even benefit your career by allowing you to make risky or unusual career moves!

Even if complete financial independence seems out of reach, building a savings safety net could allow you to go part-time, try setting up your own business or work in a more fulfilling (but lower paid) job.

When you save money now, you’re ultimately buying options for your future. Which one you choose to take is up to you!

Will you be striving for financial independence or are you convinced you’ll be working forever?  Let me know in the comments!

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