In personal finance, there’s a debate around financial freedom vs financial independence and which is better for achieving financial security. But a common mistake is assuming financial freedom and financial independence relate to the same concept. In truth, they are similar concepts with separate means to achieve the ultimate goal. Therefore, the best way to explain which is better is to look at both ideas are length.
This guide will look at the financial freedom vs financial independence debate to determine the strong points of both concepts. We aim to educate our readers on these ideas and provide a definitive answer to the age-old question.
So, let’s begin.
What Is Financial Independence?
Financial independence refers to the state where a person no longer needs to work for an income and can live off the passive income generated from their investments.
Financial independence is achieved through intelligent and smart saving and investing, allowing individuals to reach a point where their expenses are covered by their investment income.
A popular drive for financial independence is the idea of retiring early, more commonly known as Financial Independence Retire Early, or FIRE. The main driving force behind the FIRE movement is the prospect of achieving early retirement, usually well before the actual retirement age.
Achieving financial independence is easier said than done, as individuals require a healthy investment portfolio to support their lifestyle and financial needs. Here is a rundown of the main ideas behind financial independence:
- Wealth accumulation;
- Intelligent investment planning;
- Reduction of expenses;
- Income diversification;
- Financial planning;
- Living off passive income.
What Is Financial Freedom?
On the other hand, financial freedom refers to a broader concept that encompasses financial independence but also includes having the freedom to choose how to spend one’s time and resources.
It means having enough wealth and passive income to support a desired lifestyle without the need to work for money. The main driving force behind financial freedom is the desire to feel free and comfortable with your money. Moreover, financial freedom depends on several factors, including short- and long-term goals, lifestyle, and personality.
Based on these factors, some people can achieve financial freedom easier than others.
Here are the main ideas behind financial freedom:
- An adequate level of income;
- Income diversification;
- Reduction of debt;
- Financial planning;
- Financial flexibility and freedom.
Financial Freedom vs Financial Independence Differences
Several distinct factors are crucial in why these two concepts are so different. Diving into these factors will help you understand what it means to be financially free and financially independent.
Level of Financial Security
The first key difference in the financial freedom vs financial independence debate is the level of financial security both concepts provide. With financial freedom, we assume our basic living expenses are covered. The concept offers the freedom and flexibility to choose how we spend our money without worrying about financial constraints.
On the other hand, financial independence offers a greater sense of financial security since it refers to a state where we no longer have to worry about money. With financial independence, our living expenses, healthcare costs, and other necessities are fully covered by our investments.
Because of this, financial independence offers a greater level of financial security, but it also requires a significantly higher wealth accumulation compared to financial freedom.
To achieve your financial goals, you must adapt your lifestyle based on short- and long-term goals. When looking at the financial freedom vs financial independence debate, individuals can choose the concept that appeals the most to their current lifestyle. That’s another difference between financial freedom and financial independence.
With financial independence, we modify our lifestyle to purpose other interests without relying on a traditional job for income.
On the other hand, financial freedom allows us to choose how to allocate our resources, but we might still need a job to generate active income.
Therefore, financial independence offers greater lifestyle freedom if done correctly.
Time and Effort Required
Financial independence requires more time and effort to pull off compared to financial freedom.
That’s because financial independence includes careful financial planning, saving, and investing. On the other hand, financial freedom may be achievable with less effort, as it requires having adequate income and debt reduction, but not necessarily reaching a state of full financial independence.
How to Achieve Financial Freedom?
To achieve financial freedom, one must clearly understand their financial situation, including current expenses, income, and debt. Setting specific financial goals and creating a plan to reach them is crucial, as is being disciplined and patient in pursuing financial freedom.
Here are several ways how to achieve financial freedom:
- Reduce Your Expenses
An effective way to achieve financial freedom is to reduce unnecessary expenses and live below your means. This means avoiding lifestyle inflation and cutting back on non-essential expenses, such as dining out, entertainment, and luxury purchases.
- Establish a Budget
Creating a budget is crucial to understanding your current financial situation and identifying areas where you can reduce expenses.
- Reduce Debt
Pay off high-interest debt, including credit card debt, as soon as possible to reduce your financial burden and increase your disposable income.
- Increase Income
Consider ways to increase your income, whether through a raise, a side hustle, or a passive income stream. Remember that financial freedom might involve relying on a job for active income. The idea is to supplement your income through other means.
How to Achieve Financial Independence?
Financial independence is achieved by building a sufficient level of wealth and creating passive income streams that can cover your living expenses without relying on traditional employment. Here are some ways to help you achieve financial independence:
- Save and Invest Intelligently
Achieving financial independence requires a commitment to saving and investing a significant portion of your income. This means living below your means and putting your money to work for you rather than spending it on non-essential items.
- Minimize Debt
Another key aspect of achieving financial independence is minimizing debt, as high debt levels can make it difficult to achieve financial independence. This means paying off high-interest debt, such as credit card balances and personal loans, and avoiding taking on new debt.
- Define Short and Long-Term Goals
Determine how much money you need to achieve financial independence and create a plan to reach that goal. Involve both short and long-term goals to reach the desired level of wealth accumulation.
- Diversify Your Income
Diversifying your income streams can help reduce risk and ensure a steady flow of income even if one source dries up. In addition, diversification is crucial to achieving financial independence, as it provides a safety net. This eliminates the need to rely on a single source of income and the possibility of financial setbacks.
Financial freedom and financial independence are both important goals to strive for, but they have different purposes and approaches. Financial independence is the foundation for financial freedom, but financial freedom offers a greater sense of freedom and the ability to pursue non-financial goals.
By carefully managing your finances, you can determine what appeals to you the most and which is clear and obvious in the financial freedom vs financial independence debate.