Being financially independent is a dream of many Americans, but how do you get there?  While financial independence is about having enough passive income to cover your living expenses without needing to work actively, financial freedom is about living the life you want without financial constraints.

Dig in to understand the real difference between financial freedom vs financial independence and get tips to achieve both!

What is financial independence?

Financial independence is when you have enough assets and passive income to cover your expenses and sustain your lifestyle without having to work a 9-to-5 job.

When you have financial independence, you have enough investments or passive income that generates enough money to meet your financial needs. This allows you to live without being dependent on a paycheck.

What is financial freedom? 

Financial freedom is when you live life on your own terms, without the fear of hardship and without debt. It’s having enough money to cover your basic needs, like food, shelter, and healthcare, as well as being able to afford the things that bring you joy and happiness. Which might be things such as travel, hobbies, and experiences.

Financial freedom is different for everyone. For some, having financial freedom means retiring early and traveling. For others, it means having enough money to start a business or pursue a passion project without worrying about financial risks.

Or it may simply mean having enough savings to cover unexpected expenses or emergencies. It’s all about creating the life you love without going into debt.

What about financial security? How is it different?

Financial security is when you have enough financial resources to cover basic needs and unexpected expenses, such as medical bills. It means having enough savings to weather financial storms without financial insecurity, like being overwhelmed by debt or financial hardship.

So as you can see, financial freedom, financial independence, and financial security might seem the same, but they are different concepts.

4 Milestones to financial independence

Having financial independence means that you can retire early or pursue your passions without being held back by financial constraints.

However, gaining financial independence doesn’t happen overnight. Here are some of the key milestones to financial independence:

1. Pay off debt

Debt is a significant barrier to achieving financial independence. It takes a significant portion of your income, and it can be challenging to build wealth while paying off debts.

If you want financial independence, you need to be debt-free. This means learning to pay off credit card debt fast, student loans, and any other loans you may have.

If you want to be debt-free, create a debt reduction strategy and stick to it. This may involve cutting down on your expenses, increasing your income, and prioritizing your debt payments. You can also try out debt repayment plans like the avalanche vs snowball method.

2. Have emergency savings

The second milestone of financial independence is having an emergency fund. This is when you set aside money to pay for unexpected expenses such as a job loss, medical emergencies, or car repairs.

Having an emergency fund ensures that you’re prepared for any unforeseen financial events. You won’t have to rely on credit cards for unexpected expenses.

Many experts say you should have at least three and up to six months of living expenses in a savings account, but the exact amount will vary depending on your personal financial situation. For instance, a 12-month emergency fund may be your goal.

If you don’t have an emergency fund, open a savings account and start putting aside money for unexpected emergencies.

3. Get on the right track to meet your retirement goals

Around 25% of Americans don’t have any retirement savings at all, while 30% don’t feel their savings are on track.  If you want to reach financial independence, being on track to achieve your individual retirement savings goals is vital.

Retirement planning is a crucial aspect of achieving financial independence because it ensures that you have enough money to sustain your lifestyle after you stop working.

If you want to meet your retirement goals, you need to start saving for retirement early and contribute regularly. This could include setting up a 401(k), IRA, or other retirement plans.

You should also consider your retirement goals, such as the age at which you want to retire and the lifestyle you want to maintain.

4. Create enough passive income to cover your living expenses and lifestyle

One of the key milestones of financial independence is having enough passive income to cover your living expenses and lifestyle.

Passive income is money earned with no or minimal labor. For example, this could include rental income, dividend investing income, or income from investments.

To reach this milestone, you need to build a diversified investment portfolio that generates sufficient passive income to cover your living expenses and lifestyle. This could involve investing in stocks, bonds, real estate, or finding more of the best passive income ideas.

4 Milestones financial freedom

Once you’ve achieved financial independence, you can shift your sights to financial freedom.

With financial freedom, you have complete control over your finances. Achieving financial freedom requires significant effort and discipline.

Here are some of the milestones toward reaching financial freedom:

1. Create multiple revenue streams

One milestone of financial freedom is having multiple revenue streams. This means having income from multiple sources, such as starting a side hustle, rental income, or dividend income.

Multiple revenue streams not only provide you with additional income but also diversify your income sources and reduce your dependence on any single source of income.

To diversify your income, you need to identify your skills and talents and find ways to monetize them. This could involve starting a side business, investing in income-generating assets, or buying real estate.

2. Actively invest beyond retirement accounts

Actively investing beyond retirement accounts is a big step towards financial freedom. It’s one of the smartest ways to build wealth over the long term, and the sooner you start, the better.

With an investment portfolio, you can hopefully generate enough passive income for your retirement nest egg.

If you want to invest, create an investment plan that matches your financial goals with your risk tolerance. Some of the things you can invest in include stocks, bonds, and mutual funds. You may want to answer the question, “Do I need a financial advisor?” first before you start investing.

3. Increase your net worth

One key aspect of financial freedom is to start to increase and track net worth. Net worth is the assets you own subtracted from the liabilities you have, and it’s a measure of your overall financial health. Increasing your net worth means accumulating more assets and reducing your liabilities, such as debt.

To achieve this milestone, you need to focus on increasing your income, reducing your expenses, and investing your savings wisely. For instance, this may involve negotiating a higher salary, cutting down on unnecessary expenses, and investing in income-generating assets.

4. Set yourself up to not need any active income

One of the last aspects of reaching financial freedom is not needing any active income. Active income refers to the income that you earn from working for a living.

Achieving this milestone means that you have enough passive income from your investments and other income-generating assets to cover your living expenses and lifestyle.

So if you want to not have to work from 9-5 anymore or even at all, you need to build your investment portfolio and diversify your income sources.

8 Action steps to reach financial independence and then freedom

Financial independence and freedom are achievable goals, but they require discipline and effort. To reach either one, you need to take control of your finances and make smart decisions about how you earn, save, and spend money.

Here are eight ideas to help you reach financial independence and freedom.

1. Calculate your financial independence number

If you want to work towards being financially free, then you can calculate your financial independence (FI) number. This is the money you need to have saved or invested to generate enough passive income to cover your living expenses and lifestyle.

To calculate your financial independence number, you need to know your current monthly expenses, future expenses, and expected rate of return on your investments. An easy way to calculate it is to multiply your expected annual expenses by 25.

Having your FI number can help you figure out how much money you need to reach financial freedom vs financial independence.

2. Know your net worth

Knowing your net worth vs income is very useful as you work towards reaching financial freedom. Subtract your liabilities from your assets to discover your net worth.

To find a net worth number, you need to add up the value of your assets, such as your savings, investments, and property, and subtract your liabilities, such as your debts.

3. Set up a budget

A budget is an estimate of your income and expense and can help you prioritize your spending. To set up a budget, you need to list your income, fixed expenses, and variable expenses and allocate your income accordingly. You should also make sure to budget for your savings and investment goals.

There are different ways to start with better budgeting, so find one that fits your lifestyle and savings needs. The most important thing is to make a budget and stick with it.

4. Spend less than you make

Living below your means can help you spend less than you earn and prioritize saving and investing.

To truly live below your means, you need to avoid lifestyle inflation, cut down on unnecessary expenses, and prioritize your financial goals.

5. Pay off any debt you have

Paying off your debts is essential if you want financial freedom or independence. Debt can hold you back and prevent you from reaching your financial goals.

To start living debt free, you need to prioritize paying off your loans based on their interest rates, pay more than the minimum payment, and consider consolidating or refinancing your debts.

6. Know your financial goals

Financial goals help you stay focused, motivated, and accountable.

To come up with your financial goals, identify your short-term and long-term goals. For instance, saving for retirement, buying a home, or investing.

7. Create an emergency fund

An emergency fund provides a safety net and helps you deal with unexpected expenses or income disruptions. To create an emergency fund, you should set aside three to six months of living costs in a separate savings account.

Once you have an emergency fund set up, make sure to replenish it if you need to take funds out.

8. Set up an investment account

Investing can help you build generational wealth over the long term and generate a passive income that can cover your living expenses and lifestyle.

To set up an investment account, you need to identify your investment goals, risk tolerance, and investment horizon. Then choose the right investment vehicles, such as stocks, bonds, mutual funds, or real estate.

Expert tip

Whether you are pursuing financial freedom vs financial independence, know the amount of money you need and what your lifestyle must be like to achieve it. Making a plan and following through is the only way to win with money.

Why should you be financially free?

Achieving financial independence or freedom means not having to stress about money. It means being able to enjoy your life and hobbies without having to sacrifice financial security.

Being financially free can give you control over your financial future. It also provides a safety net against unexpected financial events or emergencies.

In addition, it allows you to focus on personal growth questions and fulfillment without being held back by financial constraints.

What is the amount of money needed to be free financially?

The amount you need is something you decide for yourself based on your expenses and how much money you need to be comfortable financially. Not everyone needs the same amount of money.

How long does it take to be independent or free with money?

The time it takes to reach these goals depends on your income, savings habits, and the amount of money you need to fund your dreams. You can calculate your specific time frame based on your investments, expenses, and the amount you have saved.

What basic things do you need to be free with money?

You need not only the money to pay for necessities but also for anything you might want to buy. That means you’ll need to have an amount invested (or in passive income) that pays all of your bills and gives you extra money to do whatever you would like to do.

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Decide how you will create more freedom with your finances!

Financial freedom vs financial independence are two related but distinct concepts in personal finance.

While financial independence means having enough passive income to cover your living expenses and lifestyle without needing to work actively, financial freedom means having the ability to live the life you want without financial constraints and varies for each person.

That said, both financial independence and financial freedom require careful planning, budgeting, investing, and smart financial decisions.

Whether you’re striving for financial independence or financial freedom, it’s important to define your financial goals, track your progress, and, if needed, make changes to your plans.