The most common misconception
Growing up in western Europe, how often have I heard “(s)he is financially independent since (s)he pays rent. (S)he’s employed now and doesn’t live with the family anymore.”. As if becoming financially independent was setting free from one’s parents’ financial contribution. It’s a beginning, I’d agree. For some, it might even be a major step in their lives, but it’s nowhere near being financially independent. Not that we should not support our youth to go fly by themselves and be happy with it, but after all that is part of the circle of life. Maybe we could also teach them to go one step further and raise the bar for what we call independence.
Perhaps there is a reason that we misconceive this to be financial independence. Perhaps we believe that we will never really be free from financial constraints and so the only real constraint we seek to stop is the one we put on our families. It’s enough of a psychological burden for everyone, we have to take matters into our own hands at some point and say that we are now capable of caring for ourselves. But have you ever wondered if there was another meaning to financial independence? Have you considered the fact that maybe it would be possible to do the same with other financial dependencies?
That’s where the real notion of financial independence starts to take shape. What if we could actually set free from… everything? Everything as in everything? Well, perhaps not. But from a financial standpoint at least.
The most accurate definition
True financial independence is breaking free from any financial constraints that shape your life by restricting your possibilities. Perhaps also sometimes binding you to produce a certain type of action or behaviour you would not have chosen to do otherwise. Not being financially independent necessarily lengthen the cycle of time and effort needed to reach the major life goals one would have set. It means that the friction is higher, so high sometimes that it is enough to abandon the pursuit of something that we would judge too hard to reach. Every problem is inflated because the means are limited and the task seems daunting.
If financial independence means that you are breaking away from most constraints, does that mean that you would have to be filthy rich? That question is to be expected, and the answer might surprise you: not necessarily. What you need is a very well oiled system that allows you to remain independent.
Say you would have won the lottery, perhaps as much as 100,000,000$. You feel great, you’re “settled for life”. However, even if you manage to not spend it all on sports cars and mansions, it does not guarantee that you will have enough. All of that will depend on your age, your lifestyle, cost of living, unforeseen events, health conditions, you name it. You could take that much money, and still be left with nothing at the end of your life. Such as sum of money means that you have an extremely comfortable lead on the net worth that you are “supposed” to achieve at your age (no matter how old really), but it doesn’t justify financial independence at all.
So, how do you reach it?
You would be surprised to learn that financial independence is perhaps more importantly impacted by income and expenses. Or rather “cash-flow” in general. How cash moves around and how effectively it is put to work. You might have heard this phrase: “don’t work for money, make money work for you.” That is the ground basis of financial independence. If you manage to do that for long enough, you will build that well-oiled system.
But how? First, you start by living under your means. Already, you started investing quite aggressively what was not spent during the month. Now that you accumulated some investments (and will never stop doing so), you learned about ways to reduce taxation legally, so you could profit from a larger organic growth. You understood that debt was the way to leverage growth but also reduce taxes. With the help of one or two accountants and financial advisors, you understood that it made sense for you to use a corporate structure to be even more efficient with how you intended to grow your wealth. Soon enough, you started enjoying several revenue streams. A mix of rental real estate, side business, dividends and other nice perks has been established. You managed to grow passive income that provides you with the true richness: more free time to enjoy your life. You’re under less stress, fewer constraints.
As far as the future is concerned, it feels ever greener. Why? Because retirement is not really an issue anymore, but most importantly because you are mastering the rule of compounding interest. The 8th wonder of the world according to Albert Einstein. Sooner or later, you will be able to enjoy a 5-digit income on a monthly basis and every single financial obstacle will turn into a simple dent in the road. As for all the good things you wanted to live, you will take the time to make that a priority.