Difference between financial freedom and financial independenceChen Wan Lim
The terms ‘financial freedom’ and ‘financial independence’ are often used interchangeably. While both terms do share some similarities, the implied meanings both terms carry vary greatly. For starters, both terms have fantastic meanings, indicating a person who has financial freedom and/or independence can have the liberty of undertaking a lot of things the heart desires without having to worry about money. Also, a person with financial freedom and/or independence will up a certain extent have their entire financial planning journey figured out up to the last detail. There are many definitions and interpretations of financial freedom and financial independence out there, but here’s our take on some pertinent differences between financial freedom and financial independence:
Starting with financial freedom, the word ‘freedom’ is a clear indication that a person is debt free. If a financially free person is taking home RM10,000 a month, then his or her net disposal income is essentially RM10,000 a month – without having to pay any debts such as mortgage, car loan and other debt obligations. In addition, a person with financial freedom typically has various forms of savings such as an emergency fund and a retirement fund. For example, a normal rule of thumb that most financial gurus and financial advisers usually preach about is to have approximately six months’ worth of expenses in your emergency fund should your source of income suddenly stops.
Moving a step further, having financial freedom is also the ability to acquire assets, to start an investment portfolio or to even simply splurge on luxuries without having to take on debt. All the expenses can be funded by ready cash-at-hand or from prior savings.
Contrary to financial freedom, financial independence does not mean the non-existence of debts but rather the ability to cover your current and future financial needs by relying on your personal source of income. This could be your monthly salary, dividend income from investments and returns from businesses you have invested in. A person who has financial independence could have mortgages, car loans, personal loans and other debt obligations but he or she could easily cover all of those with their current earnings.
A higher form of financial independence is the non-reliance on anyone for your daily sustenance. In other words, you will have the freedom to quit your job anytime as you do not need to work for money, but rather for the purpose of occupying your spare time or simply as a challenge.
Being financially independent could also bring about the meaning of the ability to generate your own source of income without relying on others, certainly not relying on a monthly paycheque – This applies mostly to people who run their own business.
In the end of the day, it is on everyone’s mind to achieve financial freedom and financial independence. Start by taking charge of your finances, your expenses and think of ways to diversify your income stream. There is no greater satisfaction than to know you have control over your money and that your money is working hard for you.