Jeff's Editorial #191 – Updating the concept of financial independence

Updating the concept of financial independence

As we approach the birthday of our country, we focus on the idea of financial independence.  This idea has been evolving over decades, but the last four years during the great recession has brought about a dramatic change in this evolution.

But let’s look at Wikipedia’s explanation of “Financial independence”

Financial independence is a term generally used to describe the state of having sufficient personal wealth to live indefinitely without having to work actively for basic necessities. In the case of many individuals whose financial circumstances fit this description, their assets generate income that is greater than their expenses.

A person's assets and liabilities are an important factor in determining if they have achieved financial independence. An asset is anything of value that can be liquidated if a person has debt, whereas a liability is related to debt, in that it is the responsibility of one possessing it to provide compensation.

The following are two approaches in achieving financial independence:

1. 1. Gather revenue generating assets until the generated revenue surpasses living/liability expenses.
   2. Gather enough liquid assets to then sustain all future living/liability expenses

It does not matter how old or young someone is or how much money they have or make. If they can generate enough money to meet their needs from sources other than their primary occupation, then they have achieved financial independence.

While I agree that one's assets that keep generating enough funds to sustain one's long-term financial welfare is important, I personally don’t believe that Wikipedia’s explanation of financial independence is accurate. Independence in my view is to NOT be dependent on anyone other than oneself for his own financial well being.  If a person has debt, he/she is dependent on the debtor to provide financial means to keep an asset.  2008 clearly showed the vulnerability of stock market and bond market to keep the principle intact.

Personally speaking the only sure way to start becoming financially independent is to become completely debt-free.  If you have the means to pay off your debts completely today, I advise you to do so after establishing an emergency fund equal to 6 to 12 months in expenses (I used to say 3 to 6 months, but an average unemployment period is 9 to 10 months these days).