A Critical Difference With Financial Independence & Freedom

When I first started my journey to financial independence, I didn’t exactly know what I actually wanted. I didn’t know what to call my financial goal. It is important for you to know exactly what you want because specific goals are more likely to be accomplished than general goals. If you are here then you are probably trying to decide whether you want to be financially independent or have financial freedom. There are many different ways to define these two goals, and what I offer here might be different than what you have heard before, but the two terms mean different things to me.

The difference between financial independence and financial freedom is your amount of spending and the worth of your investments when you decide to “retire”. Financial independence is more about living a frugally optimized lifestyle, and not having to rely on work income to meet your financial needs. Financial freedom, on the other hand, is about having even more choices when it comes to your budget and not worrying so much about lifestyle optimization.

Financial Independence Is About Living An Optimized Lifestyle

If you want your goal to be financial independence then you are more concerned about being self-reliant, especially when it comes to your finances. Those of us who want financial independence are typically frugal by nature. By that I mean we are not wasteful and utilize our resources as efficiently as possible (especially money).

Those seeking financial independence know that they must cut costs in the big 3 expenses first and maintain that mindset throughout their lives. The big 3 expenses are housing, transportation, and food. These make up the largest part of everyone’s personal budget, and so optimizing those expenses makes a huge impact on spending levels. To optimize in financial independence terms means to reduce the cost smartly, not just cheaply. We seek to be in control of our spending as much as possible up to the point where we are still at a peak in life satisfaction.

To imagine a life of financial independence, think of living in a smaller home in a safe friendly community. Think of driving a 5 plus-year-old car that is good on gas and has a reliable reputation. Think of eating home-cooked meals every day and only on rare occasions going out to eat. Imagine having all 24 hours of the day at your disposal to pursue hobbies, passions, and projects. Imagine being a life long learner in the do-it-yourself (DIY) world when it comes to most things in your life. Does all of that sound pretty great? Because that is what financial independence is all about.

It is also important to note that because you live such an optimized lifestyle in financial independence, you do not require as much in investments in order to live. Financial independence is, therefore, easier and faster to obtain than financial freedom.

Financial Freedom Is About Having More Choices

Take all of the benefits of financial independence, while living a “normal” life and you have got yourself financial freedom. What I mean by that is if you are seeking financial freedom then you aren’t necessarily concerned as much with the optimizing of your lifestyle.

To be “financially free” would mean that you never have to take money into account when making a decision. This is completely unrealistic because there is no such thing as true financial freedom. Even multi-millionaires or multi-billionaires have to budget their money in some way. It is possible to spend a billion dollars, it might be a lot “harder” and take a lot longer to do than spending a million dollars, but it is possible. Just ask most lottery winners that have won millions of dollars, only to declare bankruptcy a few years later. There is no such thing as true financial freedom, but there is a lot more flexibility in your day to day choices when choosing financial freedom over financial independence

Those seeking financial freedom are still seeking financial independence but they might not care enough about optimizing their lifestyle and living on less. Even when pursuing financial freedom you still have to make some financial choices, but their impact is less of a concern because you have allowed for much more spending in your goal. You could say that financial freedom is wanting to live a normal lifestyle while still taking the work requirement out of the equation.

To imagine a life of financial freedom, it is very much like imagining financial independence, except that your big 3 expenses might not have been reduced down. Think of still living in a relatively large nice house in a gated community with a pool and park. Think of still getting a newer car every couple of years. (Side note: please don’t buy brand new because the 1st year of depreciation is typically the largest). Think of still eating out a few times a week when you don’t feel like cooking. Imagine still having those 24 hours in the day to pursue hobbies, passions, and projects that might cost a little bit more than average, but it’s okay. Imagine not having to do everything yourself because you can easily outsource all of the work to someone else while you continue enjoying the things you want to be doing. This is what financial freedom is all about.

Another important thing to remember for financial freedom is that it takes longer to obtain than just financial independence. In some cases much longer, and this obvious because you will be spending more and thus will require more in assets to support that level of spending.

How Much Do I Need For Financial Independence Or Freedom?

Financial Independence:

If you want to be financially independent, then a rule of thumb is that you need to have at least 25x your annual expenses in investments. So if your annual spending is $30,000 then you would need at least $750,000 in investments ($30,000 x 25 = $750,000). This number can be adjusted up or down depending on your preferred lifestyle.

As a general rule of mine, those of us wanting financial independence would want our annual spending level to be at or below the median household income. For those of you that don’t remember what the median is, it is the middle number in a sorted list of numbers from low to high. It is the most accurate way to gauge household income because it prevents outliers from skewing the result. For example, I will list some hypothetical household incomes: ($0, $10,000, $45,000, $47,000, ($50,000), $52,000, $54,000, $90,000, $1,000,000,000) As you can see, $50,000 is the median income and it would be a better gauge of the average household income because the $0 and the $1,000,000,000 incomes do not affect the result.

Now with that quick math lesson over, the average household income in America is close to $50,000, but of course, it is different from area to area because of the different costs of living. From my perspective, if you want financial independence then you are planning to spend around $50,000 a year or less. This just my perspective on it, yours might be different, but beyond this level of spending, I would consider that to be closer to financial freedom.

Another trait I see with those of us seeking financial independence is that we enjoy passion projects and making money on the side. So even though you can reach financial independence quicker, it doesn’t mean that you will never make earned income again. The saying might be “Financial Independence, Retire Early” but in a traditional sense, retirement is not an important part of the equation, the independence from being forced to work for money is. Still, the acronym “FIRE” sounds so cool and that’s why I think it has stuck and replaced just “FI”.

Financial Freedom:

The same general rule of thumb still applies to financial freedom that you need 25x your annual expenses in investments. The difference as I have mentioned is that you would prefer to spend more than $50,000 per year. I read an article once that said the income that brings the most happiness peaks at $75,000 per year. While I would strongly disagree with that statement, I will use that figure for my example of someone seeking financial freedom.

To spend $75,000 per year, we would need at least $1,875,000 in investments to support it ($75,000 x 25 = $1,875,000). This figure is over double what the frugal financially independent seeker would need in my previous example. So you can conclude that it typically will take a lot longer to accrue this amount of wealth. Alas, there is even more to the financial freedom equation. Financial freedom may warrant an even more conservative withdrawal rate.

The standard withdrawal rate is 4% per year from investments, and that is demonstrated from the 25x multiplication of annual expenses. ($1,875,000 x 4% = $75,000). The financial freedom withdrawal rate is closer to 3% in my experience. So for that $75,000 annual spending, we now need to amass $2,500,000 ($2,500,000 x 3% = $75,000). For those of you that are curious to plug your own numbers, you would need to multiply your annual spending by ≈ 33.3. This extra cautiousness of withdrawing only 3% is included because of the “free” in financial freedom.

Do You Want Financial Independence Or Financial Freedom?

So now you can ask yourself a few questions to decide whether financial independence suits you better or financial freedom is what you are after. If the first part of the question sounds more appealing to you, then financial independence might be a better fit for you. If the second part of the question sounds better, then you might want to look more into developing a goal for financial freedom. Keep in mind that they might be a little bias from me because of my passion for financial independence, so please try to see through that, here we go:

Do you want to quit working for money? Or do not mind working for a longer time?

Do you find joy in downsizing, minimizing, Or consuming less? or do those things make you feel like you are sacrificing too much?

Does net worth not really matter to you? Or do you want a high net worth?

Are your hobbies low cost? Or do they require a good deal of money?

Would you like to live in a smaller, more modest home? Or do you like having a larger home?

Would you mind driving a used, older, fuel-efficient vehicle? Or do you want to drive newer vehicles?

Do you like cooking your meals at home almost exclusively? Or do you want to eat out whenever you want to?

These are just some questions that could get you started, the last three being the most important for financial independence. No matter what you think suits you best, you might change your mind in the future, you might develop a different mindset, or you neither of them may be for you, either way, I hope that I have shined some light on the differences and similarities of financial independence and financial freedom.


So the real difference between financial independence and financial freedom is just your level of spending in my eyes. At their core, they are very closely related, but there are key lifestyle differences to take note of. No matter what we try to label the lifestyle, at the end of the day we all want the same thing: happiness. Money on its own will not make you happy, but it does help present opportunities for us to find happiness. Think about your own life and what you truly want out of it. Financial independence or financial freedom could help you get there.

Zachary Smith

Zach is passionate about personal finance, especially when it comes to financial independence. He is a heavy index fund investor and budget connoisseur that also loves traveling, exercise, and the great outdoors. See his full bio here

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