Your security is in the hands and at the whim of an organization or an individual with their own best interests at heart—not yours.
What Is Financial Independence?
Financial independence means different things to different people. To some, it means being able to pay the bills. For others, it means being able to eat out every night. Yet for some, it means being able to have three vacation homes and a yacht. I define financial independence as being able to support the lifestyle you desire without having to work.
There are two important pieces to this definition. First, you need to differentiate the lifestyle you desire from your current lifestyle. This is a signficant distinction. Too often, we reduce our lifestyle to fit within our means.1 Financial independence is not about limiting or reducing your lifestyle, but about living the life you want and having the means to support it.
Second, financial independence means you don't need to work to support your lifestyle. This just means that the income generated by your assets can fully support your expenses.
Income from labor is earned income. It requires your participation, effort, and energy. If you decide to take a year off, your earned income ceases. Earned income is how most of us receive money. Our alarm clock wakes us in the morning, wre have our cup of coffee, we take a shower and get dressed, and we drive to work. We put in our day and drive home. Every couple of weeks, we get a paycheck. This is the earned income cycle.
Earned income is an exchange of time for money. Through education and experience, we can increase the value of our time and be compensated accordingly. Even high-powered attorneys or surgeons who make hundreds or thousands of dollars an hour still exchange their time for a paycheck. The minute they stop this exchange, they stop earning income.
Financial independence breaks this cycle. It replaces earned income
with passive income. Passive income includes the following sources of income:
Investment income (e.g., dividends, interest, capital gains)
Rental real estate income
Royalties
Licenses
Partnership and business income (if you don't have to work or manage anything to receive it)
Social security and pension income
Passive income is the Holy Grail of personal finance. Why? You don't have to trade your time for it. Passive income gives you the freedom to do what you want. Earned income is a chain that restricts what you can do and when you can do it. Passive income liberates us from nine-to-five jobs and two-week vacation limitations.
Contrary to its name, accumulating passive income is not a passive endeavor! Accumulating the assets to generate passive income requires skill, education, and diligence. You can't expect to sit back and have massive amounts of passive income deposited into your bank account every month. Generating passive income from dividends and interest requires you to select and to monitor the appropriate investments. Rental income requires purchasing and maintaining commercial or residential real estate. Royalties and licenses require the development and sale of a product. Partnership and business passive income, like investments, requires the careful selection of investments and monitoring them diligently.
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