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What is Financial Independence?

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  • Written By: Jessica Ellis
  • Edited By: Bronwyn Harris
  • Last Modified Date: 21 August 2016
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    Conjecture Corporation
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"Financial independence" is a term used to describe a person who does not need to actively participate in remunerative work to cover expenses. Generally, such a person is the recipient of passive income, which may come through sources such as dividends, retirement accounts, or royalties. Financial independence is often the goal of retirement for many people, but some financial experts suggest this goal is slipping out of the achievable realm for many people.

A person who is financially dependent must actively seek sources of income in order to pay off regular debts and expenses. A young college graduate with no investment portfolio or savings will probably need to work to pay off expenses such as rent and utilities, as well as credit card debt, student loans, and automobile or house payments. The amount of money that a person needs to actively generate in order to meet expenses is the amount to which he or she is financially dependent. Through a lifetime of work, careful investing, or careers that create passive income, many people try to reduce their financial dependence until they are free from the requirements of actively earning a monthly or annual sum.

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Most financial independence comes about as the result of passive income. Income is said to be passive when it is generated from sources that do not require active, ongoing work. There are many different types of passive income that people use to work toward financial independence. Rent earned from leased property, interest made from stocks and bonds, and dividends paid out to business owners may all be sources of passive income.

Royalties and residuals are another source of passive income that can be used to create financial independence. People are paid royalties when they have generated copyrighted material to which they own the rights. In order to legally use the material, people must may the copyright holder a royalty. Actors, writers, and entertainers sometimes receive residuals for repeated showings of their work; a re-run of a TV program, for instance, often results in a residual payment made to the show's creator. Successful creative artists can sometimes achieve financial independence by relying on royalties and residuals from their past creations.

Sometimes, financial independence can be achieved through cutting expenses. Retired people may have some sources of passive income, such as retirement accounts or Social Security benefits, but these may not be enough to cover cost of living expenses. Some people manage financial independence by altering their lifestyle to suit their passive income and assets through spending cuts. The loss of expenditures can often be compensated for by the reduced stress of a full retirement.

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