Reaching financial independence is the holy grail of personal finance. But what does financial independence really mean? In this post I’d like to determine the various levels of financial independence. That’s right. Even in financial independence there is no one size fits all since everybody has a different desired standard of living.
Contrary to what you may think, financial independence is not all about having enough money to cover all your expenses and then some. Financial independence also means being able to overcome your psychological fears to truly live free.
For example, I have peers who have millions in net worth, yet still make their respective spouses work because they do not feel 100% financially secure. Common reasons include the need for health care coverage or their spouse’s “love” for their job even though they’d rather be doing something else.
Here are the three levels of financial independence I’ve come up with. All three levels of financial independence should meet the following basic criteria:
1) No need to work for a living because investment income or non-work income covers all living expenses into perpetuity.
2) Net worth is equal to or greater than the number of years left in your life X living expenses e.g. $3 million with 30 years left to live is FI if your living expenses are no more than $100,000 a year.