What is Financial Independence?

Financial independence is a point in time when you are able to sustain your desired lifestyle for the remainder of your life without having to exchange your labour to do so.

It’s hard to achieve, and unless you win the lottery, it’s unlikely to happen unless you put a plan in place. The most common method is to build wealth by investing regular amounts in a tax efficient vehicle, such as a SIPP or an ISA.

There are some elements of the definition that are worth expanding and considering if you do wish to aim for financial independence.

Desired Lifestyle

Lifestyle refers to the annual amount of money you need to live life. It doesn’t really matter what the individual items are, but it does need to be predictable. So you can live a £20,000 lifestyle, a £50,000 one or higher. You need to pick a level (in today’s money) that you want to maintain.

Inflation is the main enemy of lifestyle. Your investment assets need to keep pace with inflation over the long term in order to generate cash to support your needs.

Desired lifestyle means living the life you want to, rather than the life dictated by your available means.

Your desires can also jeopardise ever reaching financial independence. If you consume everything you earn (or more) then you are unlikely to ever get there. Like most things in life, there’s a trade off between how much of your remaining life you allocate to labour and how much to other activities.

Sustain your lifestyle

This means having a forecast in place that gives you reasonable confidence that your investment assets will produce the right amount of cash for each year in the future until you die.

Reasonable confidence means understanding the assumptions, risks and mitigations that you deploy when managing money.

It doesn’t mean “hit and hope” and equally, also doesn’t mean having a cast iron certainty of what the future will bring. Both those planning techniques are likely to jeopardise your future financial independence.

If you wish to achieve financial independence, then you need to acquire a planning capability, either by training yourself or by hiring a financial advisor.

Point in time

There’s a single point when you are confident of financial independence. There’s no earthly reason why that point has to correlate to a particular age, government policy or employment status.

It’s worth having an indicator to know when that time is coming so you can prepare for the decision. For me, the indicator was always total net worth being greater than 22 times my desired annual lifestyle. Anything less would not give me confidence of sustainability.

Having more than 22 times gives me two things: margin for planning error and additional discretionary spend.

The actual decision to declare yourself financially independent is obviously a challenging one, and in future posts I’ll cover how I made mine.

The downside of not making (or wanting) to reach a decision simply means that you will spend less of your remaining life allocating time as you wish.

Read more on this topic . . .


I am not your financial adviser.

The information in this post relates to my financial journey. It may or may not be relevant to your own. You need to make your own decisions on your own financial strategy.

Do not buy or sell anything based solely on what you read.