However, this notion of retirement, typically defined as a point in life when someone leaves their job permanently, has evolved. For many, financial independence is what most would call retirement, offering them the freedom to choose how they spend their time without the need to adhere to a rigid work schedule.
But what does financial independence really mean? How does it differ from traditional retirement? And why are more and more people turning to this concept as a new paradigm for living?
Defining financial independence
Financial independence is a state in which a person has enough income or assets to cover their living expenses without relying on a pay cheque from a job. This might sound like traditional retirement, but there are important distinctions.
The central tenet of financial independence is not necessarily about stopping work entirely. It’s about gaining the freedom to choose whether to work, rather than being obligated to do so out of financial necessity. It means achieving a level of wealth where your assets – whether invested in stocks, real estate, businesses, or other income-generating sources – produce enough passive income to cover your living expenses.
Traditional retirement versus financial independence
Traditionally, retirement has been framed as a period at the end of one’s career when individuals are expected to leave the workforce for good. In this model, retirement typically occurs after several decades of work. The goal during the working years is to save money in retirement accounts (pensions, savings plans, investments, and property) to ensure a comfortable lifestyle once one is no longer employed.
How life insurance can benefit your health and wellbeing over the decades
Sponsored by Post Office
However, traditional retirement isn’t always ideal or attainable for everyone. For many, the concept of waiting until a set age to stop working can also feel like a distant or unfulfilling goal.
Financial independence, on the other hand, gives individuals the ability to retire early or at any point they choose, based on the financial freedom they’ve built for themselves. The idea is not to wait for a specific age or milestone, but to create a life where work becomes optional rather than mandatory.
How to achieve financial independence
Achieving financial independence isn’t a quick or easy journey, but it’s possible with careful planning and disciplined execution. Here are a few key strategies to work toward financial independence:
1. Live below your means: One of the fundamental principles of financial independence is spending less than you earn. This might require significant changes to your lifestyle, such as downsizing your home, limiting discretionary spending, or finding ways to reduce living expenses.
2. Increase your income: While cutting expenses is important, increasing your income is equally crucial. This can be achieved by negotiating a higher salary at your current job, taking on a side hustle, or creating passive income streams through investments or entrepreneurship.
3. Save and invest wisely: Saving a portion of your income is key, but investing it wisely is what allows your wealth to grow. Consider low-cost index funds, real estate investments, or other vehicles that offer good returns over time. The goal is to build a portfolio that generates enough income to cover your living expenses, whether through dividends, rental income, or other passive income streams.
4. Plan for the long term: Building financial independence takes time – often years or decades. The earlier you start, the more you can take advantage of the power of compound interest. It’s essential to regularly review and adjust your financial plans to ensure you stay on track.
5. Be intentional with your time and resources: Financial independence is about more than just money; it’s about creating a life where you can control how you spend your time – the one thing that we cannot create more of, so we prioritise what we do with it. Once you’ve reached financial independence, you’ll want to ensure that your time is spent in ways that bring fulfilment, whether that’s through hobbies, family, community involvement, or personal growth.
Is financial independence for everyone?
While the concept of financial independence is appealing, it’s important to acknowledge that it may not be the right path for everyone. Some people enjoy their work and derive a sense of fulfilment from their careers, making the idea of ‘retirement’ less attractive. Others may find the sacrifices required to achieve financial independence – such as extreme frugality or working long hours – to be too burdensome or unsustainable.
Additionally, the financial independence journey requires a high level of discipline, persistence, and a long-term mindset. For some, the constant pressure to save, invest, and reduce spending can feel overwhelming. It may also take years before one reaches a level of financial security that allows for full independence, which can be discouraging for those looking for quicker results.
Financial independence offers an alternative to the traditional retirement model. For many, it’s not about reaching a certain age or waiting until retirement benefits kick in, but about gaining the freedom to choose how they want to spend their time.
Whether it’s pursuing a passion project, travelling, or simply stepping away from the stress of work, financial independence can lead to a more fulfilling and intentional life. It’s all about weighing up the relative benefits and drawbacks, and deciding the right option for you.
Paul Grant is an entrepreneur and co-author of Money Remixed: the 14 Steps to a Wealthy Mindset
