What Is Financial Independence?
For many, the concept of financial independence sparks visions of early retirement, tropical beaches, and never having to work again. But financial independence (FI) is more than a fantasy—it’s a measurable, achievable financial state.
At its core, financial independence means you no longer need to earn a paycheck to cover your living expenses. Instead, your investments, passive income, or other resources provide enough income to support the lifestyle you choose.
Imagine that – having enough income from your assets that you are able to sustain your lifestyle safely for the rest of your life without having to work another day in your life.
Sounds a lot like traditional retirement. And in a way, it is.
If you are retiring, you should be financially independent or at least have a plan to work through retirement to help fill the gap.
But financial independence can happen any point.
The Financial Independence Formula
The Financial Independence formula is simple:
Financial Independence = Non-Working Income is greater than Lifestyle Expenses
Non-working income
Non-working income is generated from a variety of sources. From an investment portfolio through either dividends, interest, and gains, to other assets such as business ownership, rental properties, etc.
Lifestyle expenses
Lifestyle expenses are simply the expenses you need in order to live the life you will feel fulfilled. Lifestyle expenses are very personal. Some people are not fulfilled unless they are spending tens of thousands a month. Others can live of just a few thousand.
If you think about that, the biggest adjustment you can make to reaching financial independence is to your lifestyle.
There is a common rule in the financial independence community (yes – there is a whole culture around this) is the 25x Rule which states you are financially independent when you have 25 times your lifestyle expenses in investments.
For example, if you spend $40,000 per year, then you are financially independent when you have $1,000,000 ($40,000 x 25). At $80,000 per year, you’ll need $2,000,000. At $200,000 per year, you’ll need $5,000,000. You get the picture.
While numbers are important, financial independence is ultimately about intentional living. It’s about aligning your spending with your values, reducing unnecessary expenses, and investing wisely to build a life of freedom.
People who pursue FI often:
- Track expenses carefully.
- Save and invest aggressively (sometimes 50%+ of their income).
- Value time and autonomy more than material consumption.
- Think long-term, often decades ahead.
What Financial Independence Means
When you reach financial independence, it doesn’t mean you have to stop. It simply means your decisions surrounding how much you have to earn to live change. You may still choose to work to earn income. But now you have:
- Freedom of Choice: You’re no longer bound to a job you dislike simply to pay the bills.
- Security: Your financial future isn’t dependent on job markets or layoffs.
- Flexibility: You can explore new careers, start a business, volunteer, travel, or spend more time with family.
It can lead to traditional retirement, part-time work, passion projects, or a combination. The ultimate goal is control over your time.
The FIRE Movement
The concept of Financial Independence has spawned into a whole movement where people work to achieve it earlier than traditional retirement ages of 60 to 67. It is a deeply passionate movement that has been dubbed FIRE: Financial Independence, Retire Early.
Here is a summary of the different types of FIRE:
1. LeanFIRE
LeanFIRE is about reaching FI with a minimalist lifestyle. People pursuing LeanFIRE often aim for lower annual expenses (e.g., $25,000–$35,000), requiring smaller portfolios but also accepting a more frugal retirement.
Example: Someone who wants to live off $30,000 per year might aim for a portfolio of $750,000.
2. FatFIRE
FatFIRE is for those who want to achieve FI but maintain or elevate their current lifestyle. This often requires a significantly larger portfolio—sometimes $2–5 million or more.
Example: A couple spending $120,000 per year would need $3 million based on the 4% Rule.
3. BaristaFIRE
BaristaFIRE blends FI with part-time work or passion-based income to reduce the size of the portfolio needed. It’s named after the idea of taking a low-stress job like working at a coffee shop to supplement income and preserve investments.
Example: If your portfolio only covers $25,000/year but you want to spend $45,000, part-time income can bridge the gap.
4. CoastFIRE
CoastFIRE occurs when you’ve already invested enough that—without adding another dollar—your investments will grow to support a traditional retirement. You can “coast” by covering only your current expenses with earned income.
Example: Someone who hits their FI target for age 65 by 35 can switch to lower-paying, more enjoyable work without worrying about retirement contributions.
Summary
Not everyone wants to retire early—but nearly everyone benefits from more financial freedom. Whether you want to stop working at 40 or simply feel less stressed about money at 60, pursuing financial independence can enhance your security, reduce anxiety, and increase your options.