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Although they are often used synonymously in the personal finance community, there is actually a distinct difference between financial freedom and financial independence.
Financial freedom is the mindset that allows you to live the life you want.
It is the ability to live your life for yourself and not for a boss. You may still have to work, but you have enough savings to live on your terms.
If your job stresses you out, you can find another job without fear of where your next meal will come from. You are free to do things like travel and buy cool stuff you want. You don’t feel the limitations of money because you have set up your finances to work for you.
Financial independence is the number in your bank account that allows you to stop working forever.
It offers you financial security. Essentially, you are financially independent and can quit your job without fear of repercussions. All your living expenses are covered regardless of your earned income. It’s a much more defined term because it looks at the money aspect of your lifestyle.
Why are the terms ‘financial freedom’ and ‘financial independence’ often confused?
Unfortunately, these terms are often confused with each other. I think that’s because their goals are similar. They both focus on your financial journey. But one – financial freedom – is a lifestyle choice; the other – financial independence – is a financial milestone.
What are the elements of financial freedom?
Financial freedom is a lifestyle choice. It is when you are financially stable enough not to be dependent on the particular job you currently have because you have enough to keep you afloat.
You’ve paid off all your debts and you have enough savings to cover major emergencies. You stop making decisions based on money and start making them based on what you want to do. You are able to change your thinking and live life the way you want.
You might decide to stop working and look for a part-time job, or start working part-time. Either way, you’ve set up your finances to have those choices.
You are able to do the things you enjoy regardless of money.
What are the elements of financial independence?
Financial independence is a milestone in your finances.
It is the moment when you have enough money to stop working and be financially sound for the rest of your life. You may still want to work, but you don’t have to. You are completely independent of a job or family. You can support yourself on your own without help from anyone else.
There are several ways to achieve early financial independence. You can build passive income, with investment property or stock market dividends. Or you can save enough to live on your investments. Either way, you have positive cash flow and will live well when you retire, regardless of your age.
The financial purpose of this level of independence is to be able to retire early and have adequate retirement savings and passive income before your death. You have eliminated all credit card debt, have passive income streams and are able to cover your annual expenses without working.
What happens when you combine financial independence and financial freedom?
The magic happens when you combine financial independence with the mindset of financial freedom. Since financial freedom is a mindset that allows you to live your best life, you can leverage that on your journey to financial independence.
You can use this mindset to think beyond just being financially independent. You can use it to imagine going on wild trips and then making them. Or about nice cars, and then buy them.
That’s not to say you have to go into debt for these things, but true financial freedom allows you to pursue your greatest dreams, and financial independence is the vehicle that allows you to do so.
Benefits of Financial Freedom vs. Financial independence
While both financial freedom and financial independence are important attributes to financial success, I argue that financial freedom is more important than financial independence.
Even if you achieve financial independence, you can feel trapped and limited without financial freedom.
By adopting an attitude of financial freedom, you will feel completely free to live the life of your dreams.
What does an attitude of financial freedom look like?
Cultivating an attitude of financial freedom starts with mindset work.
You must believe in the abundance the world has to offer and focus on choosing to see the good. This helps when you are threatened by a scarcity mindset to realize that money (and the ability to make money) is essentially limitless and there is plenty to do.
From there, you’ll want to start asking what your money can do for you. Money is a great tool that will help you achieve anything you want (but not everything you want). Focus on where your priorities lie and then start making a plan to get there.
Ask yourself, “What do I want with my money?” And then tell yourself how to get there.
If you allow yourself to see money as a tool for a better future, you can understand the key tenants of financial freedom.
Financial independence is important for financial freedom
This is not to say that financial independence is not important. It is. But you can achieve financial freedom without it.
Financial independence is important to financial freedom, as it is the culmination of your beliefs about money blossoming.
You’ve been able to envision a luxurious life for yourself, and you’ve put in the hard work of saving for it. Financial independence is financial freedom that pays off in the long run.
The two can work hand in hand to create beautiful energy and give you the opportunity to embark on great adventures regardless of your need for money.
Challenges with Financial Freedom and Financial Independence
That is not to say that the pursuit of financial freedom and independence is easy. In fact, it can be challenging because you go against society.
Society conditions us to work until we’re 60 or 70, and then retire to enjoy a few golden years before the end of our lives. When we want something different from the traditional employment path, people get scared. It’s not uncommon for friends to judge us by our choices because they act out of their own insecurities.
This can be a little daunting at first, but you have to remember that you are not living for anyone but yourself.
Common Obstacles to Financial Independence and Financial Freedom
Aside from the people in our lives who judge us for chasing something out of the ordinary, we also need to be wary of becoming our biggest obstacle to financial freedom and independence.
To achieve financial independence and financial freedom, we must think about our relationship with money.
It’s very easy to decide to live in the moment without thinking about our future financial selves. Things like budgeting and money management are hard to achieve, especially if you’re concerned about keeping up with the Joneses.
Navigating the Challenges of Financial Freedom
If you’re worried about being your own worst enemy, put safeguards around your money habits. Having an accountability buddy is a great way to prepare yourself for success. Community building is one of the best ways to ensure your progress. If you’re anything like me, you don’t want to show up at an accountability meeting without being on schedule. Having shared goals with a life partner can also be a great help.
Frequently Asked Questions (FAQs)
Below you will find answers to some of the most frequently asked questions about financial independence and financial freedom.
Why does financial freedom look different for everyone?
I might think that an ideal lifestyle is traveling around in my RV with my two dogs and cat, and yours might be like owning a high-rise in NYC.
The goal of financial freedom is different for everyone because everyone’s ideal lifestyle is different. You cannot judge your success by someone else’s success.
How do I set goals to achieve financial freedom?
Goal setting is extremely important for achieving financial freedom. You want to start with small actionable steps to get you there.
Right now, for example, my next big goal is to move. For me, that is a huge step towards financial freedom. I’ve set up smaller goals to help me break through the big picture.
The first smaller goal is to quit Starbucks. I worked there while increasing my freelance income, but the job has run its course. To quit responsibly, I need $5,000 in savings.
After I quit, I want to set aside another $10,000 to have a fully funded emergency account.
Then I can start looking for rental properties.
These small goals together form a bigger picture of financial freedom. I see the opportunities my money has given me and I use them to propel myself towards an ideal lifestyle.
What do your goals for achieving financial freedom look like?
It comes down to
Achieving financial freedom is a great goal, and if you work hard at changing your mindset, it’s a very achievable goal. You just need to be committed to living your best life and supporting it financially.
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This post What is the difference between financial freedom and financial independence?
was original published at “https://millennialmoney.com/difference-financial-freedom-financial-independence/”
