Is financial independence having enough to pay the bills coming in at the end of this month? Is it to have a six month expense buffer recommended by most financial experts? Is it not having to worry about how and where the next paycheck will come from?
The answer is partly all, depending on your current estate and perspective on financial independence. In my opinion however, financial security is having a diversified set of resources that I can count on to ensure I have the cash I need to live the kind of life I want.
Because the kind of life I want to live is different from the kind of life you want to live, there is no objective answer to quantifying financial security. Only you can answer that for yourself. But whatever it may mean to you, it is important to realize how establishing streams of passive income can contribute to financial independence and security.
Passive income is a key component of financial security because it doesn’t rely on you having to invest the time to get paid for it. In other words, you are not trading hours for dollars. When you set up a passive income stream, you are entitled to the profits generated by the stream even when you are not actively working on it.
Because you are not relying on an employer to pay you, having a passive stream of income to rely on gives you more freedom, flexibility and thus financial independence. You can choose what you want to do, when you want to do it and how you want to do it all without having to worry about how the bills will be paid, or where the next paycheck will come from.
Because passive income doesn’t require much active work, your time is freed up to work on other passive income endeavors, thereby multiplying the income effect from your passive activities. This will allow you to establish a 6 month or more buffer, pay your bills and not worry about your incoming cash to match the expenses demanded by your lifestyle.
By growing your passive income stream to a point where money is no longer a stress factor in your life, you will have attained what many refer to as financial security or financial independence. Establishing multiple streams of passive income is one way to grow your passive income stream.
Establishing multiple sources of passive income will provide you with tax planning tools you can utilize to reduce your tax burden. Taxes are one of our biggest expenses. Read my discussion on your effective tax rate to truly understand how much of your paycheck is going to Uncle Sam.
When you have financial security, you can afford to hire a talented CPA (like me ;)), who can help you maximize your tax advantages and at the same time ensure that you are complying with the income tax laws and regulations.
You will also benefit from becoming a better money manager when you start to move toward financial independence. When you start to understand the relationship between your passive income profits, taxes and reinvestment of those earnings, you will begin to view money the way the more affluent folks do.
When you are making a good amount of money, you can reinvest your earnings in more resources that will yield passive income while benefiting from a lower tax burden. Your CPA will also require you to record and track your financial activities.
Becoming financially secure or independent is one thing, maintaining it is another. Maintenance takes some work just like anything worthwhile in life. Learning to manage your passive earnings is a key step on the way to financial freedom.
When you change your perspective on earning and money management, you take a large step toward a more permanent state of financial independence. That my friend is advice from first hand experience.
Readers: How do you define financial independence?
Here is how the Wiki contributors define financial independence.