Financial Freedom vs. Financial Independence: What’s the Difference?

February 15, 2022

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If you’ve stepped into the world of money for even the shortest second, you’ve heard the terms financial freedom and financial independence. Often you’ve heard them used to mean the same thing, but are they really the same? And how are they wrapped up with retirement?

It’s much like Disneyland, and Disney World. They’re the same, but not. Similar, but different. They’re under the same big umbrella, but not identical. You get the picture. 

To put it really simply, financial independence is not relying on your income, or another person, to cover all your expenses, where financial freedom is a mindset, and living the life you’ve always wanted. I’m sure you have more questions, so let’s dig a little deeper into the whole thing.

What is Financial Independence?

Financial independence is pretty easy to define but breaks down into a lot of smaller parts. Financial independence is when your residual, or passive, income either meets or exceeds what your budget is. It’s when you can finally say you rely on no one but yourself. 

Calculating Your FI Number

Financial independence is a number you can nail down. The conventional advice is 25x your annual expenses.

When you’re financially independent, and you maintain your lifestyle at the same level of your current expenses, you won’t need to work and you won’t run out of money. Where financial freedom is a mindset, financial independence is about net worth. 

Related Content: How to Create a Financial Independence Plan

How Do I Save Enough to Be Financially Independent?

There are several ways to hit financial independence. You can invest in stocks and bonds, or real estate. But you want enough passive income coming in from those investments to cover your expenses indefinitely.

The issue with retiring once you hit financial independence, the main proponent of the FIRE movement, or Financial Independence Retire Early, is that more than likely your needs will change in the future.

Having enough to cover more than just your expenses today is what moves you into financial freedom. 

And you really never know what’s coming down the pipeline in life. Your parents might need to move in with you, or laws around real estate change or taxes change, or any other number of small things that you think are stable right now shift. Maybe you or someone you love is in an accident and needs ongoing care or physical therapy that’s not covered by your insurance. Having some safety net for those is a smart pursuit.

Financial independence is an amazing goal, but it’s the middle step. At this point, you’re going to be maintaining your current standard of living, and it’s probably just enough to cover your current lifestyle. Not knowing what the future holds means you’re independent, but not yet free. So, what constitutes freedom in the FIRE world? 

Related Content: FIRE Movement: Pros and Cons of Pursuing Financial Independence

What is Financial Freedom?

financial freedom
Photo by Alberto Casetta on Unsplash

Financial freedom can mean different things to different people, but let’s try to nail down a definition, or at least a concept.

Studies have found that financial freedom is a mindset, and it’s the opposite of a scarcity mindset. What I might consider financially free, you might consider not enough, so it really does differ from person to person. 

The Financial Freedom Mindset

You can start to think about financial freedom as the time when money no longer drives your decisions. It’s no longer feeling constant stress and anxiety hanging over you because of or around money. It’s not about net worth, it’s about having confidence in your finances and feeling free.

When you’re financially free, your passive income covers all your expenses, as well as the lifestyle you want to be living. Again, this is why it’s nebulous and hard to nail down, but only you can decide the lifestyle you want. 

For some, it’s living minimally, so financial freedom comes sooner. For others, it’s living in luxury, so they’ll have to make more to sustain that lifestyle. You don’t have to live like the rich to be financially free.

The Different Levels of Financial Freedom

Forbes offers 8 levels of financial freedom. I’m going to simplify it to the main three on the walk to financial freedom.

Step 1: Financial Security

This is when you’re making enough extra money that in the event you lose your job, you’d still have enough income coming in to cover your expenses. 

Step 2: Financial Independence

This is when you have enough passive income coming in to cover your lifestyle, not just the basics. 

Step 3: Financial Freedom

Finally, there’s financial freedom. This is enough passive income to cover your dream lifestyle, to do what you want. Or, enough passive income to maintain your lifestyle while affording extras.

Related Content: The Progressive Levels of Financial Independence

What Does Life Look Like When You’re Financially Free?

Living financially free means you get to do what makes you happy before you have to consider the price. You can use money in a way that aligns with your goals and values. It also means that if life changes (and you know it will), you’ll be able to overcome financial challenges without worry.

For me, when you’re working towards FI (the Financial Independence part of Financial Independence Retire Early, or FIRE) you may have a number in mind that you can retire at once you reach it. But financial freedom means you’re able to do what you want without having to live tightly within a budget. You can treat yourself on occasion and give yourself little life upgrades that you might not be able to if you retired when you hit the financial independence number.

To loosely figure out what kind of budget you’re looking at to feel financially free, separate out the discretionary money in your budget from the required expenses. Then double your discretionary money. 

Now, you’ll need to take that 2x discretionary budget plus your required expenses and multiply it by 25 before you’re financially independent, but having a financial goal in mind is your first step. 

Again, even with this scenario, that might not be enough for me to feel completely financially free. Sure, I’d have more room in my budget, but would I feel free? This is where financial freedom is difficult to describe. It’s really individual, and my comfort level and yours will be completely different. 

To sum it up, financial freedom is about lifestyle and mindset. When you’re no longer ruled by the consideration of “how much” first, you’re financially free.

Financial Freedom vs. Financial Independence: Similarities

How are financial freedom and financial independence similar?

Well, for starters, they’re both about having enough passive income that you don’t have to rely on working to cover your expenses. They both involve living without debt or reliance on anyone but yourself and encourage you to change your thinking and your habits around money.

Both financial freedom and financial independence describe ways to live where you’ve made a plan about your finances and stick to it. They both involve having passive investments making money for you. Financial independence is the first real stepping stone into financial freedom. 

Related Content: Best Budget Apps (2022): 15 Cheap or Free Online Budgeting Apps

Financial Freedom vs. Financial Independence: Differences

Now, how are financial freedom and financial independence different?

As I said above, financial independence is the first real step into financial freedom. Before you run, you have to walk. Financial independence is walking. It’s building and learning what you need to be truly free.

Financial independence is a hard number with a formula. It’s knowing exactly how much you need to earn passively to cover all of your expenses. Financial freedom is pushing beyond that, to know that you can live the way that you want and have that lifestyle covered by your passive income. 

If you were climbing a mountain, and financial freedom was at the top, that’s the view that you came to see, and financial independence is about halfway up the mountain. Still a gorgeous view, but not quite to the summit yet.

It is possible to be financially independent, but still unhappy, living a life that you didn’t design. But financially free is living in alignment with your goals and values, without looking at price first. 

Financial independence is living the life you need, and financial freedom is living the life you want.

In this way, financial freedom isn’t about money or a dollar amount. Your freedom might cost less or more than mine. Financial freedom is when you can confidently live the way you want off of passive investment income alone.

Financial Freedom Examples

Faith & Leo-Jean Louis

Financial freedom looks different for everyone. It’s a mindset, and it’s where you in particular feel freedom around money. My first layer of financial freedom is going to the grocery store and not worrying about how much the total is. It’s knowing I have enough in the bank to cover it.

Someone further into their journey may feel financially free when they can eat out whenever they want, or upgrade their hotel stay to a better room when they desire. Maybe you don’t feel financially free until you can donate to the causes you love every month without wondering where that money is coming from.

Perhaps you’re a big dreamer, and you won’t feel financially free until you know you can do or buy whatever you want without dipping into any of your savings. 

For most, it’s about being able to quit the day job and live life the way they’ve always wanted, knowing they’ll likely never run out of money. It can be about only doing the work they enjoy because they don’t need the income to live how they want. Either way, it’s about choice.

Check out this great story about Faith & Leo-Jean Louis, who saved and invested $100,000 while paying off their debt. See how they are living for financial freedom.

Financial Independence Examples

Jim White and Family

What’s a good example of financial independence? Anyone who has about 25x their annual expenses invested.

For me, financial independence looks like having enough passive income from my investments to cover me indefinitely if I couldn’t work. Financial independence is stepping off the hamster wheel of debt-repayment, and only using what you have to pay for your life. 

There’s a huge swing in the numbers for financial independence.

I have a huge family, so 25x my expenses is around $3 million. If you have one or two kids, your number might be less than $2 million.

If you’re married with one kid and love living the minimalist lifestyle, maybe you take pride in your frugal ways, and your number is closer to $1 million. 

Check out this great story about Jim White who invested enough to leave his career, and learn What Financial Independence Means for him.

Financial Freedom vs. Financial Independence: What Should You Pursue?

Now that you have a better idea of what financial independence is vs. what financial freedom is, you can hopefully start to decide what you want to pursue. Many of those striving for FIRE are happy to reach financial independence and retire. 

I am extra cautious in general and so financial freedom is what I’m working for. I want to be completely at ease with my finances and never have to worry about sticking to tight, frugal parameters in my budget. It really has a lot to do with your risk tolerance.

Of course, if you’re reading this, you’re likely already aiming for financial independence, that first step into financial freedom. I believe that’s the goal for all of us, to not be reliant on trading our hours for money and to keep our families as safe as we can from economic hardship. 

Financial independence is a great goal to achieve, and should be celebrated! But that next goal, financial freedom, shouldn’t be ignored.

It might be lofty, but it’s the one filled with beach vacations, Disneyland, paying for college, and helping our kids buy a home. The one where we feel safe. It’s where I’m headed. Let’s meet up there for a playdate. I’ll bring the drinks.


What do you think of financial freedom vs. financial independence? What is the difference for you?

Please let us know in the comments below.


Lindsey Smith

Lindsey Smith

Lindsey Smith is a freelance writer, copywriter, and personal finance expert. She loves writing about retirement planning, saving money, investing in real estate, and credit card rewards. When she’s not writing, she’s doing yoga, hiking, reading, or hanging out with her super awesome kids.

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