Financial Independence vs. Financial Freedom: What’s the Difference?

Financial independence and financial freedom are terms often used interchangeably and they can mean different things to different people. In our opinion, financial independence and financial freedom have distinct meanings and implications for one’s financial journey. Understanding these differences is crucial for anyone aspiring to gain control over their finances and shape their desired future. In this article, we will explore the definitions, characteristics, and paths to achieving financial independence and financial freedom, helping you choose your desired financial destination. 

What Is Financial Independence? 

Financial independence refers to a state where an individual’s assets (wealth and other resources) exceed their living expenses. They may not necessarily need to work in the traditional sense, though many do; they work because they want to, not because they need to. Achieving financial independence allows one to have control over their time and choices, providing a level of financial stability and security. 

Definition and Key Characteristics of Financial Independence 

Financial independence is about having enough income from investments, savings, and other passive sources to meet your daily expenses without needing to work a traditional job. This state of financial self-sufficiency is marked by several key characteristics: 

• Income from Assets Exceeds Daily Expenses: The primary indicator of financial independence is having enough income from your assets to cover your living expenses. This income can come from various sources such as investments, rental properties, dividends, or other passive income streams. 

• Control Over Time and Choices: Financial independence grants you the freedom to decide how to spend your time. You can choose to work, pursue hobbies, travel, or engage in activities that bring you joy without being constrained by financial pressures. 

• Focus on Long-Term Financial Stability: Achieving and maintaining financial independence requires disciplined saving and smart investing. It involves creating a robust financial plan that focuses on long-term security and stability.

Steps to Achieving Financial Independence 

Achieving financial independence involves a series of intentional and strategic actions. Here are key steps to guide you on this journey: 

1. Set Clear Financial Goals:

• • Define what financial independence looks like for you. Determine the amount of passive income needed to sustain your desired lifestyle. 

• • Break down your goals into short-term, mid-term, and long-term objectives to create a clear roadmap. 

2. Create a Financial Plan:

• • Develop a comprehensive strategy that includes saving, investing, and managing expenses. 

• • Regularly review and adjust your plan to be sure it aligns with your evolving financial situation and goals. 

3. Maximize Income:

• • Seek opportunities to increase your income. This can include advancing in your career, developing new skills, or starting a side business. 

• • Explore passive income opportunities, such as investing in rental properties, dividend-paying stocks, or peer-to-peer lending. 

4. Reduce Expenses & Stick to a Budget:

• • Practice frugality by identifying and eliminating unnecessary expenses. Prioritize spending on essentials and value-driven experiences. 

• • Create and stick to a budget to maintain financial discipline and consistent savings. 

5. Eliminate Debt:

• • Focus on paying off high-interest debts first to reduce financial stress and increase disposable income. 

• • Avoid accumulating new debt by living within your means and making mindful spending decisions. 

6. Invest Wisely & Diversify Your Income Streams:

• • Diversify your investment portfolio to minimize risk and maximize returns. Include a mix of assets such as stocks, bonds, real estate, and mutual funds. 

• • Stay informed about market trends and investment opportunities. Consider seeking advice from financial advisors to make informed decisions. 

7. Build an Emergency Fund:

• • Establish an emergency fund to cover at least three to six months’ worth of living expenses. This fund acts as a safety net during unexpected financial challenges. 

• • Keep the emergency fund in a separate, easily accessible account to make sureit is available when needed. 

8. Continuously Educate Yourself:

• • Stay informed about personal finance and investment strategies. Read books, attend seminars, and follow financial news. 

• • Continuously improve your financial literacy to make better decisions and adapt to changing market conditions. 

By following these steps, you can help yourself move closer to achieving financial independence. This journey requires commitment, discipline, and a proactive approach to managing your finances, but the rewards of financial stability and freedom are well worth the effort.  

What Is Financial Freedom? 

Financial freedom is the next step; it builds upon the concepts of financial independence but extends beyond. To us, it means that your assets don’t just cover your living expenses; they also cover the costs of your dreams and goals (e.g., your ideal lifestyle). It encompasses the ability to make choices aligned with one’s values and passions without being limited by financial constraints. Achieving financial freedom generally empowers individuals to live life on their terms, pursuing meaningful experiences and fulfilling their aspirations. 

According to a 2023 survey of 2,000 U.S. adults by Empower, both spenders and savers view financial freedom as being synonymous with resilience and independence. Key indicators include not needing financial assistance from family and friends (47%), achieving a specific net worth (44%), and regularly contributing to a 401(k) (42%). 

Definition and Key Characteristics of Financial Freedom 

Financial freedom is characterized by several key elements that distinguish it from traditional financial independence, though there is often some overlap depending on one’s individual circumstances: 

• Ability to Make Life Choices Without Financial Constraint: Individuals who achieve financial freedom can make decisions based on their values and interests rather than financial necessity. 

• Pursuit of Passions and Interests Without Worrying About Money: Financial freedom allows for the pursuit of hobbies, passions, and interests without the stress of financial limitations. 

• Living a Life Aligned with Personal Values and Goals: Those who attain financial freedom can live in a way that reflects their deepest values and long-term goals, fostering a fulfilling and meaningful life. 

Steps to Achieving Financial Freedom 

Achieving financial freedom involves a series of deliberate and strategic actions. Here are the key steps: 

1. Define Your Financial Freedom Goal:

• • Identify what financial freedom means to you. Consider both financial and lifestyle goals. 

• • Set specific, measurable, and time-bound goals to create a clear vision for your financial future. 

2. Develop a Comprehensive Financial Plan:

• • Create a plan that includes budgeting, saving, investing, and managing expenses. 

• • Regularly review and adjust your plan to stay aligned with your goals and changing circumstances. 

3. Build Multiple Income Streams That Make Money With and Without You:

• • Diversify your income sources to create financial stability and resilience. 

• • Explore opportunities such as investments, rental properties or real estate, side businesses, or freelance work to generate passive income. People who have achieved true financial freedom are sometimes entrepreneurs or business owners who have built businesses that make money and operate effectively without their direct involvement. 

• • • Explore Various Passive Income Opportunities: Investigate different sources of passive income, such as rental properties, dividend-paying stocks, peer-to-peer lending, and royalties from creative works. Diversifying your income sources can provide financial stability and accelerate your path to independence. 

• • • Invest in Income-Generating Assets: Focus on acquiring assets that generate regular income with minimal ongoing effort. This might include real estate investments, dividend stocks, or bonds. Investing in these assets can create a steady stream of passive income that supports your living expenses, reducing reliance on active employment. 

4. Invest Wisely:

• • Educate yourself about different investment options and strategies. 

• • Diversify your investment portfolio to balance risk and maximize returns. 

• • Consider seeking advice from financial professionals to optimize your investment approach. 

5. Focus on Long-Term Financial Planning and Growth and Disciplined Saving:

• • Set Long-Term Financial Goals: 

• • • Prioritize long-term financial growth over short-term gains. 

• • • Reinvest earnings and continuously look for opportunities to grow your wealth. 

• • • Define clear and specific financial goals that align with your vision of financial independence. This could include milestones such as paying off your mortgage, saving for children’s education, or building a retirement fund. 

• • Commit to Disciplined Saving: 

• • • Develop a habit of saving a significant portion of your income consistently. Automate your savings to provide regular contributions towards your financial goals. Discipline in saving is crucial for accumulating the wealth needed to achieve financial independence. 

 

6. Maximize Retirement Contributions and Taking Advantage of Tax-Advantaged Accounts:

• • Maximize Contributions to Retirement Accounts: 

• • • Take full advantage of employer-sponsored retirement plans like 401(k)s by contributing up to the maximum limit. Additionally, consider opening and contributing to individual retirement accounts (IRAs). 

• • Utilize Tax-Advantaged Accounts: 

• • • Leverage the benefits of tax-advantaged accounts such as Health Savings Accounts (HSAs) and 529 College Savings Plans. These accounts offer tax benefits that can help grow your savings more efficiently. 

By following these steps, individuals can create a solid foundation for achieving financial independence. Long-term financial planning, disciplined saving, maximizing retirement contributions, and building passive income streams are essential strategies that contribute to financial stability and self-sufficiency. 

Key Differences Between Financial Freedom and Financial Independence 

Understanding the distinctions between financial freedom and financial independence is crucial for making informed financial decisions and setting appropriate goals. While these concepts are related, they have unique characteristics and implications for one’s financial journey. 

Lifestyle Choices and Financial Goals 

• Financial Independence: 

• • Lifestyle Choices: Financial independence primarily focuses on achieving a lifestyle where your income exceeds your expenses; passive income from investments and savings may even cover all living expenses. This state allows individuals to make life choices without necessarily considering the financial impact. It promotes a disciplined approach to money management, prioritizing long-term stability and security. 

• • Financial Goals: The main goal of financial independence is to reach a point where one’s income can maintain one’s lifestyle. Living paycheck to paycheck is the antithesis. 

• Financial Freedom: 

• • Lifestyle Choices: Financial freedom extends beyond the basic needs covered by financial independence. Income far exceeds expenses to maintain one’s lifestyle, so they can often begin to afford to elevate their lifestyle to go after some of their goals and dreams. It emphasizes the ability to make choices aligned with personal values and passions without being constrained by financial limitations. This flexibility enables individuals to pursue hobbies, travel, volunteer, or engage in activities that bring fulfillment. 

• • Financial Goals: The goals of financial freedom include not only achieving financial independence but also living a life of purpose and passion. This involves creating a financial cushion that allows for meaningful experiences and opportunities, aligning financial decisions with one’s core values. 

Impact on Career Decisions and Retirement Planning 

• Financial Independence: 

• • Career Decisions: Achieving financial independence can significantly impact career choices. Individuals may choose to continue working in a traditional job, transition to part-time work, or pursue entrepreneurial ventures without the pressure of needing a steady paycheck. The primary focus is on building and maintaining income-generating assets. 

• • Retirement Planning: Financial independence often involves detailed retirement planning, aiming for a secure and self-sufficient retirement. This includes maximizing retirement account contributions, investing strategically, and ensuring that passive income streams are sustainable in the long term. 

• Financial Freedom: 

• Career Decisions: Financial freedom offers even greater flexibility in career decisions. With financial constraints removed, individuals can choose to retire early, work in a field they are passionate about, or dedicate their time to philanthropic efforts. The emphasis is on aligning career choices with personal fulfillment rather than financial necessity. 

• Retirement Planning: Retirement planning under financial freedom goes beyond financial security or having enough to cover your retirement expenses. It focuses on creating a retirement lifestyle that reflects personal passions and values. This might include travel, hobbies, or community involvement, supported by a robust financial plan that sustains these activities. 

Financial Independence as a Journey vs. Financial Freedom as a Destination 

• Financial Independence: 

• • Journey: Financial independence is often viewed as a journey that involves continuous effort, planning, and disciplined execution. It is about progressively building wealth, reducing debt, and creating sustainable income streams. The journey requires regular evaluation and adjustments to stay on track toward the ultimate goal of financial self-sufficiency. 

• • Milestones: Key milestones on the path to financial independence include paying off high-interest debt, achieving a positive net worth, and generating sufficient passive income to cover essential living expenses. 

• Financial Freedom: 

• • Destination: Financial freedom, on the other hand, can be seen as a destination where individuals have achieved not only financial independence but also the ability to live life fully according to their desires and values. It represents the culmination of financial planning and personal fulfillment. 

• • Lifestyle: The destination of financial freedom is characterized by a lifestyle that prioritizes flexibility, purpose, and joy. It involves leveraging financial independence to pursue passions, create meaningful experiences, and make a positive impact on the world.  

By understanding these key differences, individuals can better navigate their financial journey, making informed decisions that align with their personal goals and values. Whether aiming for financial independence or striving for financial freedom, the journey involves careful planning, disciplined execution, and a clear vision of what financial success looks like for each person. 

Benefits of Achieving Financial Freedom and Independence 

Achieving financial freedom and independence brings a multitude of benefits that can significantly enhance one’s overall well-being and life satisfaction. These benefits encompass various aspects of life, including financial stability, personal growth, and the freedom to pursue passions. 

Reduced Financial Stress and Improved Quality of Life 

One of the most immediate and noticeable benefits of achieving financial freedom and independence is the reduction of financial stress. When financial concerns are alleviated, individuals experience a profound sense of relief and peace of mind. 

• Minimized Anxiety Regarding Money: 

• • Financial stability reduces the constant worry about meeting monthly expenses and dealing with unexpected financial emergencies. 

• • This minimized anxiety leads to better mental and physical health, as stress-related issues are lessened. 

• Enhanced Living Standards: 

• • With financial freedom, individuals can afford a higher quality of life, including better housing, healthcare, and education. 

• • Access to higher-quality goods and services enhances daily living, making life more comfortable and enjoyable. 

• Improved Health and Well-Being: 

• • The reduction of financial stress positively impacts overall health, generally leading to fewer stress-related illnesses and a better quality of life. 

Increased Opportunities for Personal and Professional Growth 

Financial freedom and independence open up a world of opportunities for personal and professional development. Without the constraints of financial worries, individuals can explore various paths that contribute to their growth and fulfillment.  

• Career Flexibility: 

• • The freedom to explore different career paths without the pressure of needing a steady paycheck allows for greater job satisfaction. 

• • Individuals can take sabbaticals, switch careers, or start their own businesses, focusing on what truly interests and excites them. 

• Educational Pursuits: 

• • Financial independence provides the means to invest in further education and skill development, enhancing personal and professional capabilities. 

• • Attending courses, workshops, and seminars can lead to new opportunities and career advancements. 

• Personal Development: 

• • With financial freedom, individuals have the resources to engage in personal growth activities such as traveling, learning new languages, or pursuing hobbies. 

• • This continuous personal development fosters a more well-rounded and enriched life. 

Ability to Pursue Passions and Hobbies Without Financial Constraints 

Achieving financial freedom and independence grants the flexibility to dedicate time and resources to activities that bring joy and fulfillment. This freedom allows individuals to live more authentically and in alignment with their true interests and values. 

• Pursuing Hobbies and Interests: 

• • Financial freedom provides the flexibility to spend time on hobbies and interests that might have been neglected due to financial constraints. 

• • Whether it’s painting, gardening, writing, or any other passion, individuals can fully immerse themselves without worrying about the financial implications. 

• Exploring New Ventures: 

• • With the security of financial independence, individuals can experiment with new hobbies or entrepreneurial ventures. 

• • This freedom to explore can lead to discovering new talents and passions that enhance personal satisfaction. 

• Contributing to Community and Causes: 

• • Financial independence allows individuals to volunteer and contribute to causes they care about, creating a positive impact on their communities. 

• • This engagement can lead to a deeper sense of purpose and fulfillment, knowing they are making a difference. 

In summary, achieving financial freedom and independence offers significant benefits that improve overall quality of life. These benefits include reduced financial stress, enhanced living standards, increased opportunities for personal and professional growth, and the ability to pursue passions and hobbies without financial constraints. By striving for financial stability and independence, individuals can create a more fulfilling, balanced, and enriched life. 

Examples of Financial Independence and Freedom 

Financial Independence 

• Example 1: Early Retirement through Investment Income 

• • John, a 45-year-old software engineer, has diligently saved and invested over the past 20 years. His diversified investment portfolio, including stocks, bonds, and rental properties, generates enough passive income to cover his annual living expenses. 

• • John chooses to retire early. While he no longer needs to work, he occasionally takes on freelance projects for personal interest and to stay engaged in his field. 

• Example 2: Debt-Free Lifestyle 

• • Sarah, a public school teacher, has worked on paying off all her high-interest debts and building a substantial emergency fund. She has also invested in a low-cost index fund, which provides steady returns. 

• • Though Sarah continues to work, she does so without the pressure of financial instability. She could live off her savings and investments if needed but prefers to stay active in her profession. 

Financial Freedom 

• Example 1: Entrepreneurship and Lifestyle Flexibility 

• • Michael, an entrepreneur, founded a tech company. His business generates substantial income, allowing him to sell a portion of his shares and invest in various passive income streams, such as real estate and dividend-paying stocks. 

• • Michael not only covers his living expenses but also funds his passions, such as traveling, supporting charitable causes, and pursuing new business ventures that align with his values. 

• Example 2: Philanthropic Endeavors and Personal Fulfillment 

• • Lisa, a retired executive, has achieved financial freedom through smart investments and strategic financial planning. Her wealth not only supports her lifestyle but also allows her to make significant charitable donations and fund community projects she is passionate about. 

• • Lisa spends her time volunteering, mentoring young entrepreneurs, and traveling to places she has always wanted to visit, all without financial worry. 

Common Misconceptions About Financial Freedom and Independence 

There are several misconceptions about financial freedom and independence: 

• Myth: Financial Independence or Freedom or Means Being Wealthy: 

• • Financial freedom is about having financial stability and control, not necessarily about accumulating wealth. 

• Myth: Financial Independence or Freedom Requires Extreme Frugality: 

• • Financial independence focuses on strategic saving and investing, not on extreme cost-cutting measures. 

Practical examples to clarify these misconceptions include: 

• Example 1: A teacher with modest savings achieves financial independence through effective budgeting and minimal debt, despite not being wealthy. 

• Example 2: A couple reaches financial freedom by investing in dividend-paying stocks and maintaining a balanced budget, living comfortably without extreme frugality. 

Conclusion

Understanding financial freedom and independence is essential for effective financial planning. One important note: These concepts are general ideas; they help individuals set realistic goals, plan effectively, and make informed decisions. This does not mean that people who have not achieved these definitions of financial independence and freedom may not experience some of the same benefits outlined above.  

Starting the journey toward financial freedom and independence today can lead to a more secure and fulfilling financial future. Consult a financial professional to create a personalized plan tailored to your unique financial situation and goals. By taking these steps, you can pave the way for a life of financial independence—or freedom. 

 

 

 

---

Standard Disclosure

This blog expresses the author’s views as of the date indicated, are subject to change without notice, and may not be updated.  The information contained within is believed to be from reliable sources.  However, its accurateness, completeness, and the opinions based thereon by the author are not guaranteed – no responsibility is assumed for omissions or errors.  This blog aims to expose you to ideas and financial vehicles that may help you work towards your financial goals. No promises or guarantees are made that you will accomplish such goals. Past performance is no guarantee of future results, and any expected returns or hypothetical projections may not reflect actual future performance or outcomes. All investments involve risk and may lose money. Nothing in this document should be construed as investment, tax, financial, accounting, or legal advice. Each prospective investor must evaluate and investigate any investments considered or any investment strategies or recommendations described herein (including the risks and merits thereof), seek professional advice for their particular circumstances, and inform themselves about the tax or other consequences of any investments or services considered.  Investment advisory services are offered through Liberty Wealth Management, LLC (“LWM”), DBA Liberty Group, an SEC-registered investment adviser.  For additional information on LWM or its investment professionals, please visit www.adviserinfo.sec.gov  or contact us directly at 411 30^th Street, 2^nd Floor, Oakland, CA  94609, T: 510-658-1880, F: 510-658-1886,  www.libertygroupllc.com. Registration with the U.S. Securities and Exchange Commission or any state securities authority does not imply a certain level of skill or training.

 

References

Danielsson, Matt. (December 21, 2023). How to Reach Financial Freedom: 12 Habits to Get You There. Investopedia. https://www.investopedia.com/articles/personal-finance/112015/these-10-habits-will-help-you-reach-financial-freedom.asp 

Empower. (n.d.) Making it: How Americans feel about financial independence. https://www.empower.com/the-currency/money/research-financial-independence 

TD Bank. (n.d.) How to Achieve Financial Independence. https://www.td.com/us/en/personal-banking/finance/achieve-financial-independence