Understanding the Difference between Financial Independence and Financial Freedom

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Although it’s common to hear the two phrases ‘financial freedom’ and financial independence’ used interchangeably, they do not mean the exact same things. The two ideas are interlinked but involve subtle differences in interpretation. If you’re interested in working towards building passive wealth, it’s important to understand the meaning of each concept.

What is the difference between financial freedom and financial independence?

 

Financial Independence

Financial independence refers to earning a fixed income through assets like real estate, treasury bonds, fixed and variable deposits, bank savings accounts etc. You achieve financial independence when your income from passive sources is able to meet your monthly, quarterly or yearly expenditure. In simpler language, this means that you are no longer dependant only on your active income (income from your job or business) to pay your bills.

Financial independence implies that you are now working because you want to and not because you are obliged to. If you decide that you no longer enjoy your job, you can switch jobs without worrying about pending bills. Financial independence goes a long way in allowing you to choose a career of your liking. The smartest way towards achieving financial independence involves investing your assets.

Putting it in a nutshell, when the income/cash flow from investments becomes equal to or exceeds working income, it minimises reliance on your employer.

 

Financial Freedom

Financial freedom, on the other hand, is a more dynamic variant of financial independence. While financial independence means ‘having enough’, financial freedom means ‘more than enough’. You achieve financial freedom at a point where you no longer worry about booking a holiday to Paris or paying for a new car. Financial freedom implies abundance and plenty.

Financial freedom is highly individualistic in nature. For some it could mean no longer having to worry about Christmas bills, while for others it could mean the freedom to book exotic holidays. The definition is deeply linked to what you wish to use your financial freedom for. On the whole, it means freedom from debt and worry without having to lurch from one salary to another.

In the last analysis, there is not much difference between the two except that financial freedom takes the concept of financial independence to a whole new level. Financial independence allows you to retire early without having to worry about money while financial freedom lets you enjoy your life the way that you’ve always wanted.

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