Financial Independence vs. Financial Freedom: This Key Difference Changes Everything…
By: Frankie Calkins
Tags: Financial Freedom, Early Retirement, Fire Movement, Financial Independence, Achieve Financial Freedom

Photo by Laurenz Kleinheider via Unsplash

Financial independence and financial freedom. There are plenty of definitions and ways to think about these terms. In fact, they are often used interchangeably in the personal finance space.

However, by framing them as distinct, with financial independence as a numerical goal and financial freedom as a state of mind, you will ultimately lead a more meaningful and successful financial journey.

While financial independence is an amazing goal, achieving a mindset of financial freedom is equally important. It is also possible to reach financial freedom and the benefits that come with it, well before you reach financial independence.

What is financial independence?

As a general definition, you reach financial independence when you have enough assets, investments, and passive income to cover your expenses. If you maintain the same lifestyle, you can reasonably expect to never run out of money without needing to work.

When you are financially independent, you choose how you want to spend your time. You can pursue your passions, travel, or volunteer. You name it!

Though there are different equations for determining when you have reached financial independence, it is typically a mathematical calculation: 25 times your annual expenses. It is achieved when you reach a certain net worth.

For most people, this is a massive goal. It may mean saving up a million dollars or more. It could be years or decades away.

What is financial freedom?

Financial freedom is not a number. It is a mindset. It is when money no longer drives your decisions. You are guided by your passions and values as opposed to simply price.

One way to illustrate this concept is through the three levels of wealth or the three ways that people tend to think about their money and how to spend it:

1. Price: The exact dollar amount — you only care about how much you are spending.

2. Cost: The overall economic impact — you consider what you are getting for the price.

3. Value: Your personal feeling of satisfaction — does this item or experience align with your core values? Does it bring you happiness?

As you move up these levels, you start to take on more of an investor mindset. You reach financial freedom when you think in terms of value first, cost second, and price third.

Financial freedom is when money is no longer the primary reason that you do or don’t do something. Price alone does not determine your actions.

What would your life look like if you were financially free?

Another way to understand financial freedom is to think about what currently stresses you out about money. What could change if you were at peace with your finances?

For one person, reaching financial freedom is when they are completely out of debt. For another, it is when they can go to the grocery store and have absolute confidence that they have enough money in their account to cover the bill. For you, it could mean having enough saved up to quit a job that is making you miserable.

The key is that being financially free is not achieving a certain net worth. It is different for everyone because it is a state of mind. It is no longer feeling a constant hum of stress and anxiety about money. It is psychological freedom and financial confidence.

The danger of single-mindedly pursuing financial independence

If you pursue financial independence as a numerical goal, without analyzing what you need to feel financially free, the journey will be a lot more difficult and unpleasant.

Even when you have reached a point where you could make decisions to greatly improve your life, you may continue taking actions that make you unhappy because all you care about is reaching financial independence as quickly as possible.

For example, you may choose to keep working long hours, sacrificing quality time with your family. You may turn down a job that you are passionate about simply because the salary is less than ideal. Even though money is not scarce, you still make decisions with a scarcity mindset.

Financial independence as a goal is simply a number. However, it’s possible that when you achieve it, you still may not be happy. Financial freedom, on the other hand, means starting to live the life that you want to live, and it is achievable well before you reach financial independence. Even with less money, you may discover more happiness.

You can live a rich life without being rich

Many people may think that all they need to do is reach financial independence to be happy. While financial independence is still an incredibly empowering goal for your money, financial freedom is critical for your happiness.

Financial freedom means:

Stressing less about money

Discovering what you value and what makes you happy

Being able to spend your money and time in alignment with your values

Once you are financially free, you can make choices that make you happy, even if you are still years away from the mathematical version of financial independence. Once you are financially free, you can make the most out of your life immediately.

Check out my video on this topic for more thoughts on the differences between financial independence and financial freedom, plus advice for getting on the path towards both. Do you agree with my definition of financial freedom? Let me know!