Financial independence is the status of having enough

income Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. Fo ...

wealth Wealth is the abundance of valuable financial assets or physical possessions which can be converted into a form that can be used for transactions. This includes the core meaning as held in the originating Old English word , which is from an I ...

sufficient to pay one's living

expense An expense is an item requiring an outflow of money, or any form of Wealth, fortune in general, to another person or group as payment for an item, service, or other category of costs. For a leasehold estate, tenant, renting, rent is an expense. Fo ...

s for the rest of one's life without having to be

employed Employment is a relationship between two parties regulating the provision of paid labour services. Usually based on a contract, one party, the employer, which might be a corporation, a not-for-profit organization, a co-operative, or any oth ...

or dependent on others.Cummuta, John.
The Myths & Realities of Achieving Financial Independence
". Nightingale Conant. Retrieved on 14-Sep-2009 Income earned without having to work a job is commonly referred to as

passive income Passive income is unearned income that is acquired automatically with minimal labor to earn or maintain. It is often combined with another source of income, such as a side job. In the United States, the IRS divides income into three categories ...

. Others define financial independence differently according to their own goals. There are many strategies to achieve financial independence, each with their own benefits and drawbacks. Someone who wishes to achieve financial independence can find it helpful to have a financial plan and budget, so that they have a clear view of their current incomes and expenses, and can identify and choose appropriate strategies to move towards their financial goals. A financial plan addresses every aspect of a person's finances.

Passive sources of income to achieve financial independence

The following is a non-exhaustive list of sources of

that potentially yield financial independence. * Bank

fixed deposits A fixed deposit (FD) is a financial instrument provided by banks or NBFCs which provides investors a higher rate of interest than a regular savings account, until the given maturity date. It may or may not require the creation of a separate acco ...

and monthly income schemes * Business ownership (if the business does not require active operation) *

Dividend A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-i ...

s from stocks, bonds and

income trust An income trust is an investment that may hold equities, debt instruments, royalty interests or real properties. They are especially useful for financial requirements of institutional investors such as pension funds, and for investors such as retir ...

s *

Interest In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distin ...

earned from deposit accounts, money market accounts or

loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that ...

s * Life annuity *

Notes Note, notes, or NOTE may refer to: Music and entertainment * Musical note, a pitched sound (or a symbol for a sound) in music * ''Notes'' (album), a 1987 album by Paul Bley and Paul Motian * ''Notes'', a common (yet unofficial) shortened versio ...

, including stocks and bonds * Oil leases *

Patent licensing A license (or licence) is an official permission or permit to do, use, or own something (as well as the document of that permission or permit). A license is granted by a party (licensor) to another party (licensee) as an element of an agreeme ...

* Pensions * Rental property * Royalty from creative works, e.g. photographs, books,

patent A patent is a type of intellectual property that gives its owner the legal right to exclude others from making, using, or selling an invention for a limited period of time in exchange for publishing an enabling disclosure of the invention."A ...

s, music, etc. *

Trust deed (real estate) In real estate in the United States, a deed of trust or trust deed is a legal instrument which is used to create a security interest in real property wherein ''legal'' title in real property is transferred to a trustee, which holds it as securit ...

Approaches to financial independence

If a person can generate enough income to meet their needs from sources other than their primary occupation, they have achieved financial independence, regardless of age, existing wealth, or current salary. For example, if a 25-year-old has $1000 in expenses per month, and

assets In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can ...

that generate $1000 or more per month, they have achieved financial independence. They have no need to work a regular job to pay their bills. On the other hand, if a 50-year-old has assets that generate $1,000,000 a month but has expenses that equal more than that per month, they are not financially independent, as they still have to earn the difference each month to make all their payments. However, the effects of

inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...

must be considered. If a person needs $100/month for living expenses today, they will need $105/month next year and $110.25/month the following year to support the same lifestyle, assuming a 5% annual

inflation rate In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...

. Therefore, if the person in the above example obtains their

from a

perpetuity A perpetuity is an annuity that has no end, or a stream of cash payments that continues forever. There are few actual perpetuities in existence. For example, the United Kingdom (UK) government issued them in the past; these were known as conso ...

, there will be a time when they lose their financial independence because of inflation. If someone receives $5000 in

dividend A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-i ...

s from stocks they own, but their expenses total $4000, they can live on their dividend income because it pays for all their expenses to live (with some left over). Under these circumstances, a person is financially independent. A person's assets and liabilities are an important factor in determining if they have achieved financial independence. An ''asset'' is anything of value that can be readily turned into cash (liquidated) if a person has to pay debt, whereas a '' liability'' is a responsibility to provide compensation. (Homes and automobiles with no

s or

mortgages A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any ...

are common assets.) Since there are two sides to the

asset In financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value of ownership that can ...

s and

expenses An expense is an item requiring an outflow of money, or any form of fortune in general, to another person or group as payment for an item, service, or other category of costs. For a tenant, rent is an expense. For students or parents, tuition is a ...

equation, there are two main directions one can focus their energy: accumulating assets or reducing their expenses.

Asset accumulation

Accumulating assets can focus one or both of these approaches: * Gather revenue-generating assets until the generated revenue surpasses living/liability expenses. * Gather enough liquid assets to then sustain all future living/liability expenses.

Expense reduction

Another approach to financial independence is to reduce regular expenses while accumulating assets, to reduce the amount of assets required for financial independence. This can be done by focusing on simple living, or other strategies to reduce expenses.

Passive sources of income to achieve financial independence

Approaches to financial independence

Asset accumulation

Expense reduction

See also

References

Further reading