Do You Know Financial Independence vs Financial Freedom vs Financial Security? The Key Differences You must Know!
Do You Know Financial Independence vs Financial Freedom vs Financial Security? The Key Differences You must Know
Everyone in this world thinks and wishes that he or she should not have any financial issues, do whatever want to do without any financial worries and at least basic regular income should be there without any work to do.
This is a dream and fantasy almost everyone see or has it, but to get there we need to do something before that.
Let's try to do deep dive in this article to understand "What is Financial Independence", "What is Financial Freedom", "What is Financial Security" and "what all are the differences" and "how to achieve these".
Table of Contents
What is Financial Independence or Financial Independence Definition?
As the name "Independence" describe, this financial independence definition means you should definitely be having sufficient assets and passive income streams to generate enough money for your regular expenses, needs and wants. And moreover, you don't have to be dependent upon one direct source of income or to work from 9-5 or 10-6 jobs. In my opinion even financial independence for women is mostly needed and important too.
What is Need vs Want?
I will give you a very small example and hope you can understand with that.
Every person does some kind of purchases everyday/every month or every year. He/She cannot stop that.
Need: A person buys or purchases the things without which his regular day-to-day life is stopped or impacted heavily. Suppose, your groceries, regular medicines, daily use + some office/party/casual clothing/accessories, , or a car for a taxi owner by which he earns bread and butter etc. Meaning without these, your or family life is compromised.
Want: A person buying most of the liabilities without which his/her or their life's is not stopped or impacted. Suppose, I want to buy a Home Theatre System or a luxury car or a super high end TV/Fridge, or an international vacation etc, but without these also my life is not impacted. Even sometimes we want to buy something because we desired it earlier or recently we saw that or some of our friends have that, so we also want to buy. These may not bring any value in our life, but we bought them. Meaning most of the desired things come under Want.
Hope, you got the financial independence meaning to most extent.
Hope, you got the financial independence meaning to most extent.
What is Financial Freedom or Financial Freedom Meaning?
Financial Freedom is different for everyone, person to person. Financial Freedom means you are having enough money so that you don't have to worry about your basic needs, expenses needed for your hobbies or happiness like travelling to different places, or partying, etc and live your life on your own terms.
For some people, this can be like start a small or any kind of business without financial stress or for some they would be having adequate amount for covering basic needs and healthcare or for some even it can be retiring early and enjoy the life.
There are many financial freedom apps or financial freedom books in marketplace or online which promise to guide you, but you need to work on yourself.
What is Financial Security or Financial Security Definition?
As the name suggests, you can be financially freedom or financially independent, but you also need to make sure that you should get any hiccups during any sort of financial hardships or debts or unforeseen incidents, rather it should at least cover your basic needs during any kind of unprecedented situations. This is your first financial security and the true financial security definition or financial security meaning.
Now, you might think, all these three Financial Independence/Freedom/Security seem or sound the same, but all these three are actually different concepts, and are inter-related.
How to be Financial Independent?
To get any kind of independence, you need to do the ground work and some activities. Independence or financial Independence don't come overnight. If you get financial independence, you don't have to worry much about all financial expenses and may retire early or follow your passions. To get the true sense of financial independence meaning, you need to work on some important things.
To start with,
Below are some steps:
Below are some steps:
1. Know your Financial Independence amount figure and goals:
First calculate the amount of your current monthly expenses, and then add inflation percentages to that. Next calculate the total monthly expenses required for next 30-50 years (deepening on your age). After that finalise your financial goals so that you can start working towards them.
2. Know your Net Worth:
After you got the financial independence number, calculate your net worth. You need to consider your deposits, savings, investments, properties, assets etc, and don't consider the liabilities.
3. Create a Budget Plan:
According to your lifestyle and expenses, you need to create a plan for your income, investments and expenses. You will get the idea accordingly and then you can prioritise your spending.
Then in your initial days, start spending less, cut down your unnecessary expenses and focus on savings and investments.
4. Have a Term Insurance:
This is a protection which is needed for sure for you to make sure you don't bring unnecessary and headache situations for your loved ones in case any unforeseen situation happens.
5. Have a Health Insurance:
This is another protection cover, which will help you and your family members in case anyone counters any sort of unprecedented huge medical expenses.
6. Have an Emergency Fund: Build an Emergency fund for your own sake. No one knows when the whole world will become entirely upside-down for him/her. So, if you are in a job, there may be a chance of job loss or similar unprecedented situation is applicable for a business man or may be a medical emergency etc. Hence, I suggest you to have a separate emergency fund, where you keep your 6 months of regular living expenses or 3 months of full salary in an account. If you can do, you can even park 12 months of basic living expenses/6 months salary in that account. My suggestion is that, never have your emergency fund less than your 3 months basic expenses anytime.
7. Pay Off your Debts:
We take debts to build some assets or even some liabilities. If it is assets, then okay, but it is for any liabilities like car or TV etc, then that is not a good debt. Many times debts become significant blockers for many to be financially independent.
So, my suggestion would be for you to list down all your debts somewhere first. Then assess if your debt interest percentage is higher than you get interest from your investments, then clear off the debts first, else it will extract a significant amount of portion from your income in the initial period and you will find challenge to build wealth.
Next clear off the other kind of debts also become debt free and open the door for financial independence.
Guys, if you have any loan from any credit-card, then clear that first and fast.
8. Create Enough Passive Income Streams:
If you have taken care the first 4 points, not it is time for investment. Here, you need to target for creating passive income streams, meaning the income streams you would give active time today, but down the line you don't have to give your 100% of time, rather you may give hardly 1-2% of your time to manage or track the incomes.
First target to create the passive income streams to cover your regular living expenses and then you can target for covering the luxury lifestyle expenses. make sure you have a diversified portfolio, instead of investing all in creating one passive income
Some example of passive incomes can be: stocks, mutual funds, bonds, real-estate, digital products, angel investments etc..
How to be Financial Freedom?
Since you have achieved your entire financial independence or so sort of financial independence, then you need to start thinking and working on getting Financial freedom.
So to get financial freedom, it will need your significant amount of efforts, dedication and the discipline. Telling you, that it will be roller coaster ride, not an easy ride. You can use any financial freedom calculator online too to calculate your freedom to finance.
Below are some steps:
1. Create Multiple Income Revenue Streams:
Having multiple income revenue streams will bring you financial freedom, like side business, rental income, land/real-estate business or dividend incomes or guaranteed incomes from some investments etc..
2. Upskill Yourself:
When you learn a new skill, there are high chances of earning more using that. Create digital contents one time and sell them in all possible platforms later. Many people also get promotion or get better salary raise while on job by learning new skills.
Even you can monetize your passions and talent/skills.
3. Be a good Investor:
Even you can monetize your passions and talent/skills.
3. Be a good Investor:
Instead of only in retirement plans, you need to invest in different places to build wealth over long term like Stocks, Mutual Funds, Bonds, Real Estates, start-ups etc based on your risk appetite... Reduce your liabilities and invest to build more assets.
Everyone must strive towards getting financial independent/freedom/free for at least making their own live better, not to be taking too much of stress about money and lead a happy, peaceful life, and follow your passions.
When you achieve this, you take control of your finances and this becomes a protection for your and your family members and moreover it creates a better life your your generation to come.
Why should you be Financially independent or freedom?
Everyone must strive towards getting financial independent/freedom/free for at least making their own live better, not to be taking too much of stress about money and lead a happy, peaceful life, and follow your passions.
When you achieve this, you take control of your finances and this becomes a protection for your and your family members and moreover it creates a better life your your generation to come.
How much money is needed to be Financially independent or freedom?
There is no fixed amount for all like the way there is no one fit size of cloth for everyone. So, like we discussed above, the financial goals can be different for each one of us. So, you need to assess what is your goal and how much of money could be enough for leading a good and stress-free life. Based on your goal, it can take the proportionate amount of time to achieve this goal. But, first at least target your next 20-30 years of monthly basic expenses are covered, which should not be worried at all. Use an financial freedom calculator for a high level assessment..
Suggestions or Tips
To achieve a financial independent/free life, you need assessment, a careful and meaningful planning, budgeting, investment, dedication of following the plan and some smart decisions.Conclusions:
In this post, I have shared with you the details about Financial Independence, Financial Freedom, Financial Security and The Key Differences. If you liked our post, then do share it with your friends and family and stay connected with our website (newswisestories.blogspot.com) to get other such lovely and exciting information related to Investment.
Happy Investing 🙏
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