What Does it Mean to be ‘Financially Independent’?

When I used to lead personal finance workshops for my colleagues, I often started by asking attendees how they would define the term “wealth”. Some people knew exactly what purchase they wanted to make in the future – a house in the Hamptons or a new Ferrari that would signify to them (or the world) that they had “made it”. Others just wanted to travel the world, staying at the nicest hotels and eating at the best restaurants. Yet most people defined wealth as an emotional feeling of freedom or independence – in other words, the ability to do what you want without worrying about money.

That definition likely resonates with all of us – don’t we all want to choose where to live, when to travel, how much to work, and where to (someday) send our kids to school without any fear of what we can afford?

The popular Financial Independence, Retire Early (FIRE) movement has recently gained a lot of followers by formalizing a system of goals that maximizes savings (often up to 50% of income) and minimizes spending (often in extreme ways) in the pursuit of “financial independence”. FIRE proponents generally argue that 25x annual expenses could be a sufficient “wealth finish line” for many people, at which point you could withdraw roughly 4% of those savings each year to maintain your lifestyle without running out of money. (Your investments would continue to generate returns and replenish what you withdraw.) Your finish line number would vary widely based on your lifestyle – if you spend $40k / year in expenses then $1M might be enough, but the number could increase significantly once you have a family and higher expenses.

For many people, FIRE has been a successful motivator to take control of their financial lives, yet there are still plenty of critiques of the movement, especially on issues including diversity and its feasibility for lower-income populations. (If you want to learn more about what FIRE really means, the subreddit r/financialindependence links to the most popular books, guides, and other resources.) Regardless of whether you fully agree with the FIRE movement or not, the general concept of prioritizing your financial decisions to achieve more control over your life is an important concept. 

“Use money to gain control over your time, because not having control of your time is such a powerful and universal drag on happiness,” writes Morgan Housel in his new book, The Psychology of Money: Timeless Lessons on Wealth, Greed, and Happiness. “The ability to do what you want, when you want, with who you want, for as long as you want to, pays the highest dividend that exists in finance.”

Housel also highlights how a clear wealth finish line can help prevent lifestyle inflation. “The hardest financial skill is getting the goalpost to stop moving,” he writes. In a chapter called “Never Enough”, Housel describes how Bernie Madoff Bernie Madoff, who “already had everything: unimaginable wealth, prestige, power, freedom…threw it all away because [he] wanted more.” To avoid getting drawn in by lifestyle inflation (or worse, start a Ponzi scheme), it helps to share your wealth finish line with a few trusted friends or partner who can hold you accountable.

Many people pursuing FIRE assume they would quit working when they hit “independence,” but some find that quitting work didn’t necessarily bring the happiness they expected. “Very early retirement from all forms of work, despite its superficial appeal, is rare,” argues Rhymer Rigby in the Financial Times, after looking at thousands of tech company employees who made millions and didn’t quit their jobs. 

It’s not just tech company millionaires either. Three-quarters of all Americans wouldn’t quit their jobs even if they had enough money to live comfortably for the rest of their lives, according to the General Social Survey, conducted by the non-partisan and objective research organization NORC at the University of Chicago. “Those with the least education, the lowest incomes and the least prestigious jobs were actually most likely to say they would keep working, while elites were more likely to say they would take the money and run,” writes social scientist and Harvard Kennedy School professor, Arthur Brooks.

So if reaching your wealth finish line means you might still continue working, how does striving for independence really help improve your happiness? According to recent studies, wealth truly brings the most happiness when it allows us to give generously. Some people truly treat the finish line as the “final goalpost” and give away all of their wealth after reaching that number. (One great example is Alan and Eric Barnhart, who owned a fast-growing $250 million crane company but capped their own salaries and gave away ownership of the entire company into a charitable trust owned by the National Christian Foundation.)

That’s not to say you should wait to donate until you own a company or hit your wealth finish line! Various studies show that Americans give 3-6% of their income to charity each year, and “the lower-income population surprises by giving more than the middle—and in some measures even more than the top”. Regardless of how much you make, a key factor that drives happiness is giving generously to connect with others and make an impact on the lives of those around you. 

Whichever approach you take to plan your financial goals, prioritize financial decisions that will offer you more control and independence in the long term, allowing you to give generously. Your future self (and the people you can help along the way) will thank you.