Financial Independence vs Financial Freedom

Searching “financial freedom” on Google will reveal that it is often used interchangeably with “financial independence.” However, the two concepts are actually quite different.

Let me use the analogy of a child growing up.

At first, your goal for them as a parent was for them to become independent so they don’t require constant attention and can safely take care of themselves. Just like learning to crawl, walk & then run makes kids progressively more independent.

The same basic framework applies to finances. If we examine financial freedom and financial independence more closely, we can see where we fall on the spectrum and the different methods used to achieve either or both.

Financial Freedom vs. Financial Independence

A good way to think about your finances is to imagine that you are a toddler learning to walk. Do you feel like you’re able to move freely and without restriction? Can you go anywhere you want? Or are you living paycheck to paycheck?

Think about it this way. If you were to lose your job today, your life would change drastically. You would have to find a new source of income, and would likely have to downsize your lifestyle. Is there another source of income that could cover your living expenses if you lost your job? Is there an emergency fund that can be used as a backup? Would you like to have enough income to indefinitely fund your current lifestyle?

And yes, I’m talking about income, not savings. No matter how much you save, eventually you will run out of money. However, if you have a source of income that you don’t have to actively work for, it can last indefinitely. The money you make from your job is active income. To achieve financial independence and freedom, you will need multiple sources of passive income – income that you earn without having to work for it.

No one achieves financial freedom or early retirement overnight. The journey has many milestones.

What is Financial Independence?

Financial independence is the state of having sufficient personal wealth to live, without having to actively acquire it. Residual, or passive, income is the key to financial independence. Having a residual income that exceeds your budget allows you to live without having to work. When you can finally say you rely on no one but yourself, it means you have become independent.

The FIRE movement is one of the most widely follow (and controversial) in the financial realm, standing for Financial Independence Retire Early. One of it’s core principles is to cut down drastically on expenses so that you can save a large percentage of your income to contribute towards investing, sometimes upwards of 50% of your monthly take-home pay.

The concept of financial independence has been popularized by bloggers like Mr. Money Mustache & Millenial Money

Calculating Your FI Number

Financial independence is a number you can nail down. The conventional advice is 25x your annual expenses.

If you are able to support yourself financially and keep up with your current expenses, you won’t have to work and will never run out of money. When it comes to financial freedom, it’s all about mindset. But financial independence is about your net worth and not a about any other sources of income.

This strategy generally follow the 4% rule in that you shouldn’t withdraw more than 4% of your savings per year, especially in retirement.

How Do I Save Enough to Be Financially Independent?

There are several ways to hit financial independence. There are three primary ways you can invest your money: stocks, bonds, or mutual funds. One concept that most financial independent bloggers miss out on is the concept of having passive income to assist you in meeting your expenses.

A potential problem with following the FIRE movement’s principle of retiring once you have achieved financial independence is that your needs are likely to change in the future. For example, if you have kids, get married, or even divorced, your financial goals will change.

Readers of this blog (those of us north of 40) know about changing goals all too well.

The key to financial freedom is having more money than you need to cover your current expenses.

You never know what’s going to happen in life. Your parents may need to move in with you, or laws around real estate or taxes may change, or any other number of small things that you think are stable right now may shift. If you need extensive care or therapy after an accident that your insurance doesn’t cover, you may have to pay for it out of pocket. It is a good idea to have some safety net for those people.

Financial independence is an amazing goal, but it is only the middle step. You will continue to live at the same level as before and it is most likely just enough to support your current way of life. Not knowing the future gives you a sense of independence, but you’re not free until you experience it. So, what constitutes freedom in the FIRE world?

With that said, let’s move to the next concept of financial freedom.

What is Financial Freedom?

Financial freedom can mean different things to different people, but let’s try to nail down a definition, or at least a concept.

Some studies suggest that having a financial freedom mindset is the key to achieving financial freedom, while the opposite – a scarcity mindset – will prevent you from ever reaching that goal. Different people have different ideas about what financial freedom means. For some people, having a lot of money is not important.

The Financial Freedom Mindset

You can start thinking about financial freedom as the time when you no longer have to let money control your decisions. When you are not constantly worrying about money, you will feel less stress and anxiety. It’s not about how much money you have, it’s about feeling confident and free when it comes to your finances.

When you’re financially free, your Passive Income will support the lifestyle you want to live, as well as all your other expenses. This is why it is hard to define what lifestyle you want as it is vague. You have to make the decision on what lifestyle you want.

For some people, living with fewer possessions leads to financial freedom sooner. Some people view luxury as a necessary part of their lifestyle and thus must earn more money to maintain it. Although having a lot of money can make life easier, it is not necessary for financial freedom.

The Different Levels of Financial Freedom

My mentors at Cashflow Tactics who introduced me to the concept of financial freedom discuss three main “levels” of it. Make sure to check out my review of the Cashflow Tactics Program.  There are three levels of financial freedom. The three main things you need to do to achieve financial freedom are:

Step 1: Financial Freedom

This is achieving financial stability to the point that if you were to lose your job, you would still have enough income to cover your basic expenses. Once you hit this level you are indeed financially free.

Step 2: Lifestyle Freedom

When your passive income covers your current lifestyle.  Essentially you won’t have to change a thing about your day to day living at this level with income strictly from your investments.

Step 3: Legacy Freedom

Finally, there’s legacy freedom. This is enough passive income to allow you to live the lifestyle you want, to do what you want. Or, money from passive income sources that is enough to cover your lifestyle expenses plus some extras. You have ample money to pass down to your children or dependents and create a full “legacy” for yourself.

What Does Life Look Like When You’re Financially Free?

You can do what makes you happy without worrying about the cost. You can use money in a way that helps you achieve your goals and values. This means that you will be able to overcome financial challenges without worry if life changes.

The goal of FI is to have enough money saved up that you can retire as soon as you reach your desired number. But financial freedom means you’re able to do what you want without worrying about money. Once you reach financial independence, you can treat yourself more often and give yourself little life upgrades that you might not have been able to if you had retired then.

To get an idea of what kind of budget you need to feel financially free, look at your discretionary expenses separately from your required expenses. Then double your discretionary money.

You will need to take your discretionary budget plus your required expenses and multiply it by 25 to be financially independent. Having a financial goal in mind is your first step.

Even if I were to win the lottery, I might not feel completely financially free. If I had more money, I would have more room in my budget, but I don’t know if I would feel any more free. This is where financial freedom is difficult to describe. How comfortable you feel will depend entirely on you as an individual.

In conclusion, financial freedom is about lifestyle and mindset. If you’re not thinking about “how much” money you have first, you’re financially free.

Financial Freedom vs. Financial Independence: Differences

Now, how are financial freedom and financial independence different?

Discussed earlier was that the first step to financial freedom is financial independence. Before you run, you have to walk. Financial independence is walking. True freedom comes from within. It’s something that you have to build and learn for yourself.

Financial independence is a hard number with a formula. This means understanding exactly how much you need to earn through passive means to cover all of your expenses. Financial freedom is the ability to live the lifestyle you want without having to worry about your income. Passive income covers your living expenses so you can live without worry.

The view of financial freedom that you would see if you were to climb a mountain is only halfway up the mountain of financial independence. The view is still beautiful, but we’re not quite at the top yet.

Although you may have money, you can still be unhappy if you’re not living the life you want. Living in alignment with your goals and values is what it means to be financially free, not worrying about the cost.

A key differentiator between the two is mindset.  Financial Independence (& in particular FIRE) focuses on savings and scarcity of money while Financial Freedom focuses more on abundance and creating more value in the world.

How to Achieve Financial Freedom Through Investing in Real Estate

More people have become millionaires by investing in real estate than through any other means.

Why is that? What are some ways you could bring in additional streams of income? There are many things you could do, such as writing a book, starting a business, creating a new mobile app, or pursuing other ventures.

All of those ventures require a lot of skill, knowledge, experience, and often money to get started.

Okay, now let’s look at real estate. You can make money from real estate by buying a property and renting it out. Very similar to Monopoly & stacking up little green houses. Sounds simpler then those other complicated business ventures, right?

This is what was going through the minds of all the real estate millionaires.

You don’t need to be a rocket scientist to invest in real estate. Generating income does not require a lot of money.

At 40PlusFinance.com we are big fans of Turnkey Real Estate Investing as the primary method in which we invest in real estate.  If you aren’t familiar with the concept, make sure to check out our article, “What Is Turnkey Real Estate“.

Investing In Turnkey Rental Properties

Let’s say that you had $20,000 to invest. Out of the $30,000, $25,000 was put into a rental home and $5,000 was for reserves just in case you had repairs or vacancies to pay for..

After you buy a property, you can then rent it out to someone who will pay you rent every month. The rent they pay is more than the mortgage, so you would have money left over every month. This particular property provides $3,000 of cash flow per year. Not bad for a $30,000 investment.

While $250 a month is not a lot of money to retire on that is just one property. If you rented out five homes, you could make up to $1250 per month.

You can read about our full plan for freedom in our laid out Financial Freedom Plan.

There is no single solution that will lead to financial freedom. You have to create your own path by taking one small step at a time.

Investing In Real Estate Syndications

Another way to invest in real estate is to invest in a real estate syndication, where a group of people invest together. This can be a good option if you don’t want to deal with the hassle of finding and fixing up a property yourself.

A real estate syndication is where a group of investors come together and each invest a certain amount of money. Together, they have enough money for the down payment and any renovations that need to be done. It’s similar to the rental home example, but on a larger scale.

The sponsors are the people who are doing the hard work. The people responsible for a rental property’s syndication are in charge of everything that would normally fall to the homeowner, like finding tenants and working with the property management team. They also oversee any renovations that take place.

The sponsors of an investment receive a portion of the profits, but the majority of the money goes to the people who invested.

This is an example of how much money you would make if you invested 50,000 dollars into a real estate syndication with a projected 10% return. You would make around 5,000 dollars a year, or 400 dollars a month.

Syndications are passive, meaning they require little to no effort to maintain. You use the time and expertise of the sponsor partners to do all the hard work. When you invest in a real estate syndication, you are not responsible for any active duties. You invest your money, then start seeing returns.

This allows you to quickly diversify your income by investing in different markets and asset classes. By doing this, you will create multiple streams of passive income.

Go Forth, And Enjoy Your Journey To Financial Freedom

There is no one way to invest in real estate that will accomplish financial freedom quickly. Owning property can help you become financially free because it is easy to do and has little risk.

This map shows you the way to financial security, independence, and freedom. No matter where you are on your financial journey, this map can help guide you to your ultimate destination. It is important to enjoy the journey on any trip.

You can’t just snap your fingers and become financially free. It’s about the life lessons you’ll learn along the way, the relationships you’ll build, and the surprises and setbacks you’ll come across.

What about you, the reader?  What is your own definition of each?