Financial Tips: 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. To illustrate, a person's quarterly expenses may total $4000. They receive dividends from stocks they've previously purchased totaling $5,000 quarterly, while also having an even more substantial amount of money in other assets. Under such circumstances, a person is financially independent.

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. (Homes and automobiles with no liens or mortgages are common assets.)

The following are two approaches in achieving financial independence:

Gather revenue generating assets until the generated revenue surpasses living/liability expenses.
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. Age is potentially irrelevant with respect to financial independence — if they are 25 years old and their expenses are only $100 per month and they have assets that generate $101 or more per month they have achieved financial independence and they are now free to do things that they enjoy without having to worry about their next meal or a roof over their head. If, on the other hand, they are 50 years old and earn a million dollars a month but still have expenses above a million dollars a month, then they are not financially independent - they still have to generate the difference each month just to stay even.

Passive sources of income to achieve financial independence

The following is a non-exhaustive list of sources of passive income which potentially yields financial independence.