The Difference Between Financial Freedom And Financial Independence
Financial independence and financial freedom, are used interchangeably almost everywhere. But are they the same? Some people may tell you that there are different definitions of financial freedom and independence, depending upon the person stating that definition. Is it true? Financial independence and freedom aren’t the same things. Both of these terms have their own meanings and here’s the difference between financial freedom and financial independence.
What is the Meaning of Financial Freedom?
A person is said to be financially independent where they have enough residual income that can cover their living expenses. Financial freedom has nothing to do with being rich or having bank accounts filled with money. Rather it is about a person having the luxury to have some time to themselves and enjoying things that they like without worrying about not having slightly less money at the end of the month. Financial freedom is easy to achieve and here’s how you can achieve it in three simple steps.
How to Achieve Financial Freedom?
Clear off Your Debts and Become Free
This is the first step towards achieving financial freedom because, in the presence of debts, especially those accumulating huge interest over time, you will always be worried about repaying it. In addition to this, you will be paying the excess money that you have, towards repaying your debts. To break yourself out from the chains of debts, stay away from credit cards and personal loans. If you have an existing loan, draw a financial plan for it and use debt repayment strategies.
Start Investing in a Goal-based Approach as Soon as Possible
There are many ways of investing money like Systematic Investment Plans, Recurring Deposits, and Fixed deposits. In the new age of digitization, you can now invest in precious metals like gold and silver by Automatic Investment Plans. There are several platforms like OroPocket where you can set up a silver or gold AIP within five minutes.
Be Insured for Unforeseen Events
You never know when something urgent comes up and to prevent this urgency from draining your savings, always create a contingency fund and buy medical insurance for yourself.
What is the meaning of Financial Independence?
Financial independence is the state of a person having enough money to cover their current lifestyle expenses and some expenses beyond, without having to work and earn income. This money is known as passive income and is usually generated through the investments made by the person in his life and assets like real estate, gold, and stocks. In order for a person to be financially independent, they need to be self-controlled, disciplined and dedicated from an early age. Now you may ask how much money you need for becoming financially independent. It’s pretty simple. All you need to do is ask yourself questions about your future lifestyle, calculate the expenses, add inflation rates to them and finally add 20-25% money that you may need for any unpredictable circumstances.
How to Achieve Financial Independence?
Save and Invest as Much Money as You Can
If you are looking to become financially independent, you need to live out of the money that is left after making the necessary savings. You can invest in SIPs in Equity funds, and create retirement funds to start saving money. Avoid unnecessary expenditures and put that money into savings.
Avoid Taking Loans
If you have to take loans then choose an easy installment plan that can be repaid till the time you are still earning. Having long loan repayment time can trap you in a never-ending cycle of EMIs. This will need you to keep working.
Design a Distribution Plan for the Corpus Amount of Your Retirement Years
This helps you to divide the amount into different types of assets that offer liquidity and are movable. This way, you won’t have to work after retirement or find some other source of income.
Difference between Financial Freedom and Financial Independence
Different working individuals believe in different perspectives of finances. People who follow the “You Only Live Once” rule of life, would prefer to be financially free rather than being financially independent. On the other hand, financial independence is usually desired by people who don’t believe in this mantra and would like to wait for their retirement and do whatever they want. This is how financial independence and financial freedom differ from each other. Here are 5 key points of difference between financial freedom and financial independence.
- Financial freedom is achieved from the current source of income whereas financial independence relies on passive income to fulfill a person’s needs.
- Financial freedom is linked to living the life that you desire whereas financial independence involves waiting for retirement to do the things that you want.
- Financial freedom is about having a fixed amount of money at present and having the freedom to spend it in the way you want. On the other hand, financial independence is related to not depending on anyone to pay for your bills at your retirement age.
- You are not allowed to take any loans to be financially free. However, you are allowed to take easy loans with small installments if you want to be financially independent.
- Financial freedom involves spending money generously to fulfill your desires while making small investments. In contrast, financial independence requires you to do mindful expenditure while saving more and more.
It’s completely your choice whether you want to be financially free or financially independent. However, it is important to note here that financial independence is a step towards financial freedom. So, one must always do things that help them towards achieving both of these goals. The best way is to start investing in precious-metal-based AIPs at an early age. Doing so doesn’t only save your future, but also helps in beginning your investment journey and keeping a balanced and diversified investment portfolio.