Financial freedom and independence are confusing terms and often considered synonyms and can be used interchangeably, but they are distinct. Financial independence is a numeric goal, while financial freedom is a state of mind, and one, when considering these definitions, can successfully move ahead in the economic arena. Both have their own importance, so let us learn more about them in detail.
What is financial independence?
Financial independence is a state that signifies that one has sufficient income, savings, and investment to live a happy life. Financial independence helps one achieve a level in which one has residual or passive income to maintain the lifestyle you are leading currently, with an assurance that you will never run out of money even without work.
Though there is no fixed equation to determine financial independence in numbers, the one commonly used to be having a net worth of 25 times your annual expenses. It is a gigantic goal for most people, and they need years or even decades to achieve this goal.
What is financial freedom?
Financial freedom lies a step ahead of financial independence. Most people are delighted after achieving financial independence. Once you understand the concept of financial freedom, financial independence will not be your goal anymore. Financial freedom is always a dream component that needs passive earning to cover the current and your dream lifestyles. It includes opting for the most luxurious option among all and continuing to do the same to enjoy life utmost, without bothering for money.
Once your finances allow you to travel, shop, and spend money to do anything you want or like to do without any work or worry, you enjoy your financial freedom.
Financial freedom vs. financial independence – Common features
The common component of financial freedom and financial independence is that they both insist on having passive income so that one does not need to rely only on working to bear the expenses. They both focus on living without debt and self-trust to make money and not rely on anyone else.
Both insist on making financial goals for life and strictly work on the plan to achieve the goals. Both emphasize generating passive investment to make money. Financial independence is a step before financial freedom.
Financial freedom vs. financial independence – dissimilarities
Financial independence creates the path to achieving financial freedom. Financial independence is based on a formula that gives you a specific number for how much money you should earn passively to run your life smoothly while managing all your expenses. Financial freedom is a step further to financial independence, which emphasizes getting passive income that can help you to lead a life as per the lifestyle of your choice.
Financial independence helps you stay content and have a satisfactory life, but financial freedoms help you acquire the extremity of happiness and joy. Financial freedom allows you to make expenses or shop for anything without checking the price tag. Thus, financial independence is a numeric goal, while financial freedom is a state of mind.
Step up to achieve financial independence and freedom
Building a portfolio can help you reach financial independence, followed by financial freedom, which can help you generate passive income.
The following are the primary passive income sources
Rental earnings: If you own a property you can rent out, you will get a regular income, and rent will increase gradually over time.
Investment in stocks: If you invest in stocks that regularly pay dividends to the investors, you will get the regular income.
Fixed income investment: Low-risk bonds offer regular coupon payouts for the tenure of the bonds, which is a source of passive income for the investor.
High-yield investment funds: Some high-yielding investment funds are available, which might pose some risk but can help one generate a considerable passive income.
Endnotes
Though financial independence and freedom are distinct concepts, the same path can help you acquire both. Once you reach financial independence, you move ahead for financial freedom. But to achieve these goals, you must make a plan and stick to it in a disciplinary manner. You must play the intelligent game rather than being a hard worker and should make a budget and invest intelligently.
