On Financial Independence

I was reminded of the concept of retiring young but not necessarily rich while reading the book Your Money or Your Life (by Vicki Robin and Joe Dominguez, one of the best books on personal finance I have read so far), and thought some of you who are into personal finance may find it interesting.

You may have heard of the term “financial independence” before. It’s one of the current buzzwords in personal finance literature. But though used so often, its meaning is not entirely clear to most people. Unseasoned journalists, for example, tend to use the term synonymously as “rich” or “wealthy”. But financial independence does not mean being rich or wealthy.

Rather, financial independence refers to having enough income apart from that obtained from paid work to be able to cover all your living expenses. In other words, if your expenses are $900 a month, and your investment income (say, through fixed deposits, stocks, bonds, unit trusts or the like) is $900 a month, then technically you’re financially independent, even if your assets do not typically classify you as rich or wealthy.

This concept of achieving financial independence early in life therefore means:

  • You do not have to have be a high-income individual to achieve financial independence;
  • You do not even need to have high-value assets under your name to achieve financial independence;
  • What is important is how much you are generating from investment income; and
  • How low your expenses are.

Personally, financial independence is more important to me than becoming rich or wealthy. I’d like to choose how I make my money and how I spend my time, and not let money concerns dictate what I have to do, and when I do it.

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