I am a big believer in first and foremost laying out definitions. That way we’re all on the same page.
“Financially independent” is used to define recent grads starting their first job, wealthy investors, and small business owners. “Retirement” somehow applies to people who quit their job in order to work at another job, and to people who quit their job to be a stay at home mom, and to people who quit their job to spend their days playing golf. As you can see, very confusing.
In order to clarify things, I’ve broken down your entire financial life into five basic stages.
- Financial dependence
- Financial independence via employment
- Financial independence via entrepreneurship
- Financial independence via passive income from investments
If we’re going to talk about financial independence, it might help to start by talking about it’s opposite, financial dependence. Financially dependent is what most of us were as kids and in high school and college, in-whole or in-part reliant upon someone else to pay our bills.
Most college students are financially dependent. Stay at home moms are financially dependent. Twenty-somethings still sponging off their parents are financially dependent.
Unfortunately, if you are dependent on someone else to pay your bills, you’ve got to play by their rules. Compromise may or may not be a dirty word in these kinds of relationships.
This is where I was as a child and in college. I was fortunate enough to have my parents help me with my living expenses while in college while my scholarships covered my tuition. But since I took their help, I had to obey their rules.
Financial independence via employment
This is where most of us wind up from graduation until retirement. We’re financially independent from parents, guardians, or spouses. But we rely on our employer to provide us with wages to pay our bills. And much like the above situation, since our employer pays us, we play by their rules. These rules usually include things such as 40+ hour workweeks and business casual dress codes. For most people, these rules aren’t a problem, but for some they’re an excessive burden prompting people to seek self employment
From the time I started graduate school until the present, I’ve been in this category. I’ve paid my own way for everything. The bank of mom and dad is still there if I need it for an emergency, but I stopped making regular withdrawals a long time ago.
Financial independence via entrepreneurship
Some of us wind up in this category, striking out on your own to start a business. Maybe you run the local comic book shop, or you own and manage a fleet of rental properties, or make a living day trading stocks, or you make a living blogging and selling eBooks from a beach in Thailand. No matter how you cut it, you’re in this category.
Unlike those of us with day jobs, people in this category don’t have bosses and they don’t have to follow any rules outside of the conventions of their industry. Would you trust a lawyer who dressed in half-buttoned Hawaiian shirts? No, probably not. But let’s not kid ourselves, most business owners work hard, real hard.
I’ve thought about starting my own business several times in the past. But I never really had much of a strong desire to be an entrepreneur. Outside of a side gig, it’s unlikely that I’ll ever wind up here.
Financial independence via passive income from investments
When all your expenses are covered by passive income derived from investments, you’re in this category. When you get here, you can officially start calling yourself a rentier (a person who lives on income from property or securities). Having French origins this word automatically makes you sound classy and sophisticated. For best results use a snooty accent while sipping a glass of wine.
This is the category that I’m trying to get into. This is the category that this blog is all about. When you get here, you get to start making the rules, not just obeying them.
Retirement (early or otherwise)
Sitting on a beach. Doing nothing economically productive. Following your passions and hobbies. Spending time with your family. Spoiling your grandkids. Retirement should involve serious slacking off.
I’ll probably get here eventually, but that is likely still a long way off and entirely dependent on me first becoming a rentier.
Readers: What are your thoughts on the stages of financial life laid out above? Would you add any? Where are you on your journey?