ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

The real meaning of financial independence - beyond blurry lines of interpretations

Updated on December 28, 2015

Financial Management jargon hardly leaves space for ambiguity and interpretations; numbers can be blatantly straightforward at times! However, if there’s one question that’s often debated upon, without the regular strictness of meaning in place, it’s that of financial independence.

What does financial independence really mean? Does it mean the freedom from any debt? Does it mean the freedom to resign today without having to worry about the living expenses for your family? Does it mean the freedom to work on freelance assignments from your beachside condo in Barbados for the rest of your life?

Well, probably we’re cheating here, but the truth is that for any financial independence formula to work, it has to be tweaked and aligned to the financial goals of the individual being evaluated. Here, we are going to evaluate the much debated issue of ‘financial independence’ under different scanners.

A Conventional Take on the Question of Financial Independence

Financial Independence
Financial Independence

Conventionally, the whole question of financial independence has always been under evaluation in the light of 'assets accumulation' and 'expense reduction'. An individual can accumulate assets by adopting one of these 2 approaches -

  • accumulate assets that generate revenues to the extent that these revenues provide for the liability and living expenses of the individual
  • accumulate ample liquid assets so that future living expenses are provided for

The expense reduction side of the question, however, has less definitive answers, and ultimately boils down to making simple lifestyle choices.

Now that we're clear on the key terms, let's understand the financial formula to work out the number of years a person needs to achieve financial independence.

Years to Financial Independence = [(Yearly Expenses/withdrawal rate) - Net Worth] / PAT * Saving Rate

Where, PAT = Profit after Tax

The 'Financial Freedom by Net Worth' Criteria

Financial Freedom
Financial Freedom

The method is pretty simplistic, yet practical. It's all about accumulating a net worth (compare it to a massive tank of water) from which you can draw your annual expenses' worth (compare it to your annual need for water), for at least a period of 25 years. A word of caution here – Financial Freedom by Net Worth is not a universally acknowledged formula used to qualify financially independent individuals. You need to factor in values relevant to your lifestyle choices, income opportunities, and estimated lifetime remaining. Here’s how you do it, in 3 very simple steps –

1. Calculate your net worth.

2. Calculate your annual expenses.

3. Divide (1) by (2) and you have your Financial Freedom Ratio, which is ‘the number of years that you can continue to live at your current standard of living, without any active or passive income.’

Factors such as inflation, interest earnings, etc. are already built into this formula. Generally speaking, the question of ‘financial independence’ arises when an individual crossed the milestone of an age of 40 years. Logically extending, the general rule of qualifying an individual as financially independent is when the Financial Freedom Ratio is 25 or more. Of course, younger you are, higher your Financial Freedom Ratio ought to be.

The reason why this method works well is, because like every endorsed financial indicator, it has vital information to help the analyst devise corrective strategies. For instance, a 30 year old male earning average income as per market standards of his industry, can achieve financial independence by either accumulating investable assets to contribute to his net worth, or by reducing his annual living expenses.

In How Many Years Do You Aim to be Financially Independent?

See results

Financial Independence through Assured Cash Flows

Cash Flows
Cash Flows

Here's another noteworthy definition of the concept of 'financial independence'. This definition regards an individual as financially independent if he/she has enough promised annual cash flows that match his/her annual living expenses. This differs from the Financial Freedom Ratio concept particularly because it focuses on an individual's present ability to meet living expenses, and not on the net worth. This definition supplants 'net worth' by 'passive income', and as a tradeoff, assumes that the passive income stream of the individual will continue over the long run. Here are some examples of such passive income streams -

  • Rental Income From Intangible Assets - This includes rental real estate and rental assets such as equipment, vehicle fleets, etc.
  • Interest Earnings on Savings - Substantial bank deposits can often provide for hefty interest earnings
  • Investment returns - Continued dividends on colossal investment portfolios

Royalties from Intellectual Properties - Authors, singers, musicians, technologists, etc. can have substantial passive income contributed by royalties on their intellectual properties.

I like checking these videos of Mike and Lauren. You can check this short video as well, they talk about a simple plan here.

How To Retire Early?

A Difference of Opinion

Different Responsibilities
Different Responsibilities

This is where many financial gurus like to differ. The assertion is, why only restrict to passive income? These financial rebels are not entirely out of point. Ask yourself - why people want to achieve financial independence. Probably so that they can pursue their life interests, travel the world, spend more time with the people they love and live a more adventurous and fulfilling life. In many ways, the whole idea of passive income defies the concept of an active life, which is why some financial analysts like to replace the idea of passive income with ‘income from sources other than job’.

So, for a techy who loves to code, financial independence is just a few years down the line, provided he can continue to enjoy working on his freelance assignments, out of his regular job. This method, unfortunately, works within very blurry boundaries and is best applied to individual cases of freelancers working in a sustainable market.

Final Words

Eventually, you have to decide how important it is for you to be financially independent, what compromises you can make for that and what financial aspects you can firmly control for an extended period of time. Now that you are done reading, you know the most relevant method of evaluating your financial independence. Better still, we’d encourage you to build your own financial independence qualifier formula that accounts for financial aspects unique to your life.


    0 of 8192 characters used
    Post Comment

    No comments yet.


    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at:

    Show Details
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the or domains, for performance and efficiency reasons. (Privacy Policy)
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)