Defining financial independence

The online encyclopedia Wikipedia contains an excellent entry on financial independence, which you can find here. Off the top it says financial independence is a term that describes “the state of having sufficient personal wealth to live, without having to work actively for basic necessities.”

The distinction this blog often makes between findependence (simply a contraction I coined that means financial independence) and retirement becomes crystal clear in this Wikipedia sentence: “It does not matter how old or young someone is or how much money they have or make. If they can generate enough money to meet their needs from sources other than their primary occupation, then they have achieved financial independence.”

Exactly! It goes on to point out that if you’re 25 years old, with expenses of $100 a month and sufficient financial or other assets to generate $101 a month, then “they have achieved financial independence, and they are now free to do things that they enjoy without having to worry as much.”

Millionaires aren’t always findependent!

But here’s the compelling flip-side to this concept, which hammers home the idea that young people with simple needs can aspire to “early” findependence: the polar opposite is also true. Older folks with expensive lifestyles and large expenses may find findependence eludes them even after they reach what we used to call the traditional “retirement age.” As Wikipedia puts it, someone who is 50 years old and earning $1 million a month will not be financially independent if their expenses exceed $1 million a month. “They are not financially independent because they still have to generate the difference each month just to stay even.”

A good example of this phenomenon straight from the news is the strange case of CNET co-founder Halsey Minor, who once had a net worth of US$350 million, but recently filed for Chapter 7 bankruptcy and reputedly now has a net worth of negative US$90 million! At the other extreme are the various tales of folks living the simple life of findependence while in their 30s, some of whom have written books on how they did it. (They call this retirement, but I call it findependence). One such book is listed at the end of the Wikipedia entry: Jacob Lund Fisker’s 2010 book, Early Retirement Extreme: A philosophical and practical guide to financial independence. Interesting that he used both terms in his title.

Inflation can kill findependence

Note too the Wikipedia paragraph on inflation, which warns that someone on a fixed income may lose their financial independence if the cost of living rises faster than their financial assets. That’s an idea that hadn’t occurred to me in quite those words, and reinforces the traditional wisdom that we must always strive to inflation-proof our portfolios. At MoneySense, retirement writer David Aston wrote an excellent piece on this topic in the April issue. Given the rampant money printing of the world’s central banks, inflation is not something you can dismiss.

Thanks to Roger Wohlner, (@rwohlner on Twitter), of the Chicago Financial Planner, who first made me aware of this Wikipedia entry after I wrote a guest post for him a few weeks back. The actual Wikipedia link was contained in his own earlier blog, 5 tips for financial independence.

About Jonathan Chevreau

As MoneySense’s Investing-Editor-at-Large, he is also author of Findependence Day and co-author of Victory Lap Retirement. Reach him at [email protected], where he is the founder of Financial Independence Hub.

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