What is Financial Independence?

It is a popular belief that work is supposed to occur between 9 and 5 o’clock, 5 days a week, spanning over 40 years at least until age 65. Then and only then are you permitted to consider and prioritize the people and things that matter to you the most. At least that’s how it seems. In reality, you should also be spending your younger years enjoying moments with friends and family, exploring, traveling, and dedicating your time to the causes that you care about—not just when you're older.

Enjoying that level of time freedom requires you to reach some semblance of financial independence earlier in life. These days, however, when people hear financial independence, they automatically envision the success of the super-rich tech entrepreneur who founded a company from their dorm room and sold it for billions of dollars the very next day. Or they imagine winning a multi-million-dollar lottery prize or some other unexpected life-altering windfall. Neither of these scenarios are necessary to reach financial independence.

At its core, financial independence is simply the ability to live comfortably without having to rely on someone else for your income. It means being able to cover your living expenses for the foreseeable future, whether you are employed or not. In mathematical terms, it describes the point on a graph where the x-axis and y-axis cross; in layman’s terms, it is the point where your passive income stream(s) add up to more than your monthly expenses.

Many prominent financial experts will tell you that cutting spending to the bare minimum is the only way to achieve this. However, pursuing financial independence does not mean you have to take a vow of poverty or deprive yourself of the things you love. While it does mean consciously (and sometimes aggressively) reducing your expenses, it also means identifying the places you really enjoy spending money – the things that spark the most joy – and cutting back on the rest.

For example, an avid long-distance runner might decide to splurge on a pair of top-of-the-line running shoes every few months. These new shoes would fill them with joy every time they went out for a run. That same person might find much less satisfaction wearing any other shoes they own and only opt to replace those as needed, thereby saving (and investing) the money they might have spent on building an impressive shoe collection.

Those who make considerable contributions to their savings each year often spend less on housing and transportation than their peers. If you find yourself having trouble saving money, the main culprits are likely the roof over your head and the car in your driveway. Get comfortable with the idea of owning a home in a nice enough neighborhood and driving a nice enough car that will maintain its value for some time. This will also require you to avoid the temptation to upgrade your lifestyle with each pay increase, otherwise known as lifestyle creep.

Realizing this level of comfort is often referred to as finding your “enough” point. That number will differ from person to person depending on one’s needs and values. Research shows that up to a certain dollar amount, money has a big impact on both day-to-day happiness and overall quality of life. Once you’ve reached that point, each additional dollar adds a little less value to your life. Simply put, there is a level of wealth, way before you reach the success of Jeff Bezos, where exchanging more of your time and effort for more money becomes a losing proposition.

Aside from knowing when to stop leveling-up your lifestyle, achieving financial independence also requires regular contributions to your savings and investments in an effort to build up a portfolio of income producing assets as quickly as possible. Doing this will generate the assets that will in turn generate the income that funds your lifestyle. This can consist of traditional investments such as stocks, bonds, ETFs, or real estate, or it may consist of other valuable works (i.e., book royalties, patents, etc.) and innovations that monetize your expertise like creating online courses or digital workshops.

While you are cutting your expenses and using those savings to build your investments, you should also be working just as hard to increase your income. Whether it’s negotiating a raise with your employer, finding a better paying job, or freelancing on the side, the more you can increase your income, the quicker you will reach financial independence.

By focusing on reaching your Crossover Point as quickly as is reasonable, you can begin to build an investment portfolio that will provide you with the flexibility to choose how you occupy your days and grant you with increased security to live a life centered around enjoying things that bring you the most joy. This is what financial independence really is: having the ability to choose how and where you spend your time without worrying about covering your expenses. It is not about becoming rich; it is about creating a lifestyle that gives you freedom and control over how you live and work.

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Malcolm Ethridge, CFP® is the Managing Partner of Capital Area Planning Group based in Washington, DC. He is also the Managing Partner of Capital Area Tax Consultants. 

Malcolm’s areas of expertise include retirement planning, investment portfolio development, tax planning, insurance, equity compensation and other executive benefits. 

 Disclosures:

The information provided is for educational and informational purposes only, does not constitute investment advice, and should not be relied upon as such. Be sure to consult with your legal advisors before taking any action that could have tax and legal consequences.

Investments in securities and insurance products are:

NOT FDIC-INSURED | NOT BANK-GUARANTEED | MAY LOSE VALUE