Financial Independence vs. Financial Freedom

/ M. Pattabiraman / @pattufreefincal / 25 Comments

Published: January 26, 2015 at 8:34 am

‘What is your definition of financial freedom?’, is a question I get asked by readers from time to time.  Opinions and definitions in this regard vary widely and often a matter of convenience.  Some call it financial freedom, some, financial independence, some early retirement!

Here is my take on this subject. The following should have been in a flow chart form, but I am too lazy to draw one.

Can you quit your present job to do nothing or whatever you want?

If ‘NO’ go  to part II below.

If ‘YES’, proceed to Part I

Part I

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Can your corpus handle day-to-day expenses for the rest of your life (including the typical expenses of your partner, or spouse)?

If ‘YES’,

It implies,  You are

  • retired if you do not work for money anymore.

or

  • financially independent if you work for money when and how you feel like it. The income can be spent or invested without constraints, unless something out of the ordinary occurs. You are neither dependent on your spouse or on anyone else for income.

Assuming the corpus is large enough and nothing abnormal happens, you can be retired or financially independent for life. You can switch between the two states at will or remain in one state for as long as you want/can.

If ‘NO’

This means

  • You are dependent on your parents, partner or spouse to support you while you explore your options. Obviously a less than ideal situation which we shall not discuss further.

or

  • Your corpus can handle day-to-day expenses for some years to come, but not for the rest of your life.  You are free to take a break, pursue a passion that would give you a steady income down the line (before your corpus runs out!). You can handle your typical family expenses for a few years without depending on your partner (who may or may not be working). It seems fit to say that you free to do what you like but not whatever you like (like not working again).

You need to work, but you are free to choose your line of work. You are financially free as long as your income steadily increases and the dependence on your corpus to provide monthly income decreases. 

Financial freedom is not permanent. If something goes wrong -you are out of work, your income does not increase enough – you might be forced to take up a job that you are not too thrilled about …again.

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Part II 

You cannot quit your job, but would like to asap to be either independent or free.

Here is a checklist

1) Are you investing like your ass is on fire?

2) Are you investing productively?

3) Have you factored in at least 8% inflation after you quit your job?

4) Are you confident that you can lead a frugal life? Good but dont depend on it too much!

5) Are you hoping to beat inflation? You might, but it is best to plan with zero real-return after taxes.

6) Are you influenced by blogs like Money Mustache, Early Retirement Extreme? Don’t be. They are clueless about Indian inflation levels. So understand retirement mathematics first. That is universal. Underestimate the longetivity of your corpus.

7) Do you like the idea of a safe withdrawal rate? Don’t. Will not work for our inflation levels. You will keep withdrawing more and more as time goes by. Are you ready?

8) Have you assumed a real return for your entire portfolio or only your equity component? Common mistake. You need a good amount of debt. So don’t expect too much returns from your folio.

9) Understand volatility. Don’t assume  a SWP from an equity fund will work. It might, it might not. You can’t take that chance.

10) Keep your CV up to date. You never know, you know!

 

Do share if you found this useful
We now publish both equity fund and debt fund (+ hybrid fund) screeners each month!
Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video! ⇐ More than 415 investors and advisors use this!
Unlock the secrets of successful financial advisors and entrepreneurs with our new course!
My new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, if we had to groom one ability in our children that is key not only to money management and investing but for any aspect of life, what would it be? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parent’s plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Did you know? We have more than 1000+ videos on YouTube to explore! Join our YouTube Community!

Join our courses in exclusive Facebook Groups!

  • 550+ members are now part of our new course: How to get people to pay for your skills! (watch 1st lecture for free). Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show how to achieve by showcasing your skills and building a community that trusts you and pays you!
  • Goal-based portfolio management! Join 2220+ members and get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment of Rs. 3000 only. No recurring fees! Life-long access to videos (10+ hours content)  in an exclusive Facebook Group! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.
Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps