Financial freedom vs. financial independence: What’s the difference? Many people use the terms interchangeably. But there are distinct differences between the two ideas. And they can lead to very different lifestyles.

At Investment U, we believe financial freedom is the end goal. And financial independence is an important step to get there.

Financial Independence

The key to understanding this term is the second word: independence. According to the Oxford Learner’s Dictionary, the best definition of independence is…

The freedom to organize your own life, make your own decisions, etc. without needing help from other people.

Being financially independent means you don’t need to rely on anyone but yourself to meet your financial needs. You are able to have a roof over your head, food on the table and clothes on your back. Let’s look at a brief checklist to determine whether you’re financially independent.

Income. At this point, you have active income. Active income means you are putting in the work for your pay. Without a source of income, you have no means to pay expenses.

Bills. To be financially independent, you need to be able to pay all of your bills, such as rent and utilities. If you rely on someone else, such as a family member, for these things, you are not financially independent.

Debt. It’s okay to have debt. Most people starting a career fresh out of college have debt. It can be student loans or a car payment. And further down the road, it can include a mortgage. Having debt doesn’t mean you aren’t financially independent – as long as you’re working to pay it off and keeping up with payments.

Savings. If you’re living paycheck to paycheck, savings can be difficult. But saving is important to financial health. If your car breaks down or a pipe in your house bursts, you want to be able to cover it.

Retirement. Although this falls under the savings category, it is another aspect that determines financial independence. To be fully financially independent, you should be able to maintain your lifestyle through retirement.

Investing. In the beginning stages of financial independence, you might find it difficult to invest. Money can be tight. And low wages at many entry-level jobs result in living paycheck to paycheck with little left over. But if you have the ability to invest, you haven’t only achieved financial independence. You’re on your way to financial freedom.

It doesn’t matter how much money you make. Being financially independent is a choice you have to make. We have eight rules to help you achieve this goal here. And once you have, you can move toward the next goal of financial freedom.

Financial Freedom

Financial freedom means something different to everyone. Some say it’s the status of having enough savings and income to pay your living expenses for the rest of your life without having to rely on others. So, financial independence is the first step to financial freedom. But it goes deeper than that.

The question you should be asking is what is financial freedom to me? Financial freedom gives you the ability to make decisions based on happiness, not money. Is it providing a college education to your children? Owning a vacation house in the Bahamas? Leaving something to the grandkids?

Everyone has a different idea of what the vision holds. And everyone’s needs are different. But once you’ve achieved financial freedom, you can make the absolute most out of life because your savings and passive income can fund it. Let’s look at our checklist.

Income. To achieve financial freedom, you should have multiple streams of income. And more importantly, passive income. Most forms of passive income involve having extra money to invest into the source. That’s why it can be difficult to obtain in the financial independence step. But if you want to be financially free, it helps to have a few sources of passive income.

Bills. At this point, bills should be in the back of your mind. You have no worry about failing to pay a bill on time. And you could even perhaps afford a higher rent or mortgage payment.

Debt. At this point, you should have virtually no debt. Your student loan? Paid off. Your car payments? Paid off. Debt can be a heavy financial burden. And that makes it difficult to achieve freedom.

Savings. You should be consistently saving and have a nice cushion built up. An emergency fund is critical because you never know what life will throw your way. Being financially free means having enough saved up that if something happened tomorrow, you still wouldn’t have to worry about the bills.

Retirement. A large goal many people have is to retire early. It can be done by saving with taxable and tax-advantaged accounts like an IRA. And always check to see if your employer matches retirement contributions. Free money! But being financially free means you can obtain the goal of early retirement with the lifestyle you want.

Investing. You completed your budget for the month and found you have an extra $1,000. What do you do? Invest! This is one of the best ways to achieve financial freedom. Investing doesn’t mean gambling in the stock market. If you’re a beginning investor, I suggest you start with “Best Stocks for Beginners to Buy.”

If you’re worried about how to get there, don’t. Instead, read our article “How to Achieve Financial Freedom.” It doesn’t matter which stage you’re in. It only matters where you’re going. And Investment U is dedicated to helping you get there.

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