It’s a common fantasy to spend all day sunbathing on a beach drinking margaritas; starting the day without an alarm clock. We want to own a successful business, or live a quiet and self-sufficient life in the country. How about a penthouse overlooking the bright city lights and the ability to travel to exotic destinations on a whim? No matter the “good life” fantasy, it’ll require a financial investment and a way to sustain yourself.
I’ve had many conversations about being rich, wealthy, financially independent, or self-sufficient. While these ideas have similarities, it’s important to understand how they differ. I’ll explain those differences and tell you why I chose financial independence as my goal instead of being rich.
What is being Rich…really?
A rich person is someone with, comparatively speaking, a lot of money. A rich person has enough cash or assets at their disposal to do things or buy things that most people cannot afford. A rich person, though, only has enough money to cover their needs and desires for the short term and, unlike a wealthy person, they probably make the majority of that money working a high-paying job vs. making money passively.
So…what is being Wealthy, then?
To be wealthy is to have a lot of cash and resources at your disposal to live like a rich person – but your expenses are covered in perpetuity. Simply put: You have enough money and assets to cover a high standard of living even when you’re not working….and for the rest of your life.
Isn’t being financially independent the same thing?
Sort of yes, but kind of no. To be financially independent is to have the money and resources at your disposal to live the standard of living of your choice for as long as you choose. You have enough money to cover ALL of your expenses should you stop working.
It doesn’t matter if your standard of living is low, middle, or high. As long as your expenses are covered for the time period that you determine, you are financially independent for that amount of time.
So, you have a lot of choice when determining what will make you financially independent. You can simply adjust your standard of living, increase your income and investments, or change your time horizon.
Like many Gen-Xers and Baby Boomers, I wasn’t taught about managing money outside of balancing a checkbook.
So, what’s my story?
Like many Gen-Xers and Baby Boomers, I wasn’t taught about managing money outside of balancing a checkbook.
Our parents were taught to go to school, learn a trade, work hard and advance at one company for 30 years. Then, retire with a pension that will be handled for you by a financial professional through your employer. Back then, families made enough to meet their basic needs, have a parent at home, and take summer vacations to the Grand Canyon. Money wasn’t a big issue for most Americans even if you were in the lower middle class.
In the 2000s, I made a great salary and even had a few real estate properties under my belt. Because I hadn’t learned about budgeting and planning for my future. I didn’t know what to do with the money I had coming in, so I just spent it on things I thought made me look accomplished. Then, I lost my job
After losing my job, I felt desperate and very insecure. I hated that feeling and that’s when I realized I need to have enough money invested or coming in passively to cover my expenses – and then some – even when I’m not working.
Rich = Lots of money coming in. Just as much (or more) going out. Time horizon – it can end at any moment.
Wealthy = Lots of money coming in. A lot is invested. The only money going out is from the gains on the investments. Time horizon – indefinite.
Financially independent: It doesn’t matter how much is coming in. What goes out has to be less than what is coming in. Time horizon – it’s up to you. Determine how much you’ll need to cover ALL of your expenses for the time horizon you determine. That’s how long you’ll be financially independent. From there, you’ll save and invest until you reach the figure you’ve pre-determined for financial independence.
Why I chose Financial Independence
I chose financial independence because of its flexibility. I decide my standard of living, calculate my figure, then plan from there. I started investing late in the game, so wealthy is probably out of the question. Rich won’t cut it either because it’s not enough to make me feel secure. Tweaking my standard of living to have a carefree retirement is my goal, and living a little below my means has left me with no debt and an opportunity to save and invest more.
I’m still working on my investments and other passive income in order to reach my FI number. But, with a good financial plan, some discipline, and continuing financial education, I’m well on my way!
So what do YOU think being rich means? I’d love to hear your comments!