What is financial independence?

RETARDED_MORON SG

Warning: one of my notoriously-long articles ahead
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“Financial independence” is a popular word these days. It is an important hallmark of adulthood; in general, adults can sustain themselves financially while children must rely on others for financial support. It is general consensus that an individual who is gainfully employed and can satisfy her basic needs using her income should be considered financially independent. Conversely, an individual whose subsistence depends directly on, essentially, the generosity of other individuals should not be considered financially independent. This is a fair view of the concept of financial independence.

I disagree that financial independence should take on such a loose definition. In fact, many working adults employed by their respective companies should not be bestowed the sacred label of financial independence, regardless of how much they earn in dollar terms. Upon entering the workforce, said working adults merely transition from a phase of parent-centred financial dependence to a phase of company-centred financial dependence. This reality is pretty intuitive to most but rarely examined on the deeper level that it deserves. Just as a child can realistically expect money, love and a sense of belonging from only one practical source, her parents, an employee can realistically expect money, work benefits and career opportunities from only one practical source, her company. In return, the financial provider gets to largely dictate how the dependant should act and think, explicitly or otherwise. By allowing her financial provider to have a monopoly of her freedoms – freedom of conduct, freedom of thought and freedom of growth, the dependant is actually trading her basic powers of self-determination for things that she could not have obtained by herself. She is ultimately not self-sufficient.

What then is financial independence? Generally, any self-employed individual who earns enough to satisfy her fundamental needs, and who is not at the mercy of just a few customers or suppliers, should be considered financially independent. For most people, it is not difficult to see that a plumber registered as a sole trader is higher on the independence continuum than a sales executive employed by a medium-sized enterprise. The fact that the sales executive may earn four or five times more than the plumber does not nullify the fact that the plumber retains more power of choice in her daily working life; financial independence should not be confused with financial abundance. Yet a plethora of factors make people choose the path of financial dependence, such as company-sanctioned, sky-high salaries and the illusory prestige of working in a giant multi-national corporation. To “choose the path of financial dependence” is obviously a cop-out, often couched in pseudo-strategic language such as “cost-benefit analysis” and “risk assessment”; anyone who proclaims that is basically saying, “I cannot make a sky-high salary on my own and derive prestige from my own accomplishments, therefore I need to borrow these privileges from somewhere else”. This is the paradigm of avoidance, of hoping to attain quick and easy glory through unrighteous means. This is also the fundamental mindset of people who hope to garner instant respect and admiration by gaining admittance to brand name schools, companies or societies, as if they miraculously transform into a more sophisticated version of their former selves upon entering said organisations.

This paradigm of avoidance is all too common nowadays and can be observed virtually everywhere on multiple levels. A quick peek into the psyche of the reasonably smart and hardworking student would reveal how ingrained this paradigm of avoidance is in today’s society. Too many of today’s students genuinely believe that they can cheat their way through life by just studying really hard and eventually acquiring a professional job, without building a real understanding of surrounding political, economic and social realities. They either honestly believe that those things command less importance than their professional education or complacently assume that they will somehow magically acquire this deep awareness and knowledge of reality upon graduation. “We are specialists,” the medical student would think, “so why should we learn on a serious level about political developments, the economy, the law, commerce, science, technology, the stock market, etc.?” Many students basically feel contented and sufficient in possessing a skill set consisting solely of holding a tongue depressor or drafting agreements that say things like “in good faith” and “without limiting the generality of the foregoing”. Eventually, they have to subordinate their professional freedom to less fulfilling employment last resorts because they are unwilling earlier in their lives to pay the price that enables them to become economically self-sufficient – to become self-reliant creators of value. They have no one to blame but themselves when encountered with stifling corporate hierarchies, unreasonable bosses, long working hours, intellectually-suffocating work and incommensurate salaries (sometimes all simultaneously).

Nonetheless, this phenomenon is not surprising, considering the scripting process that these poor innocent children undergo since young. With the government, the media, schools, parents and other irresponsible actors constantly highlighting the glamour and security of professional jobs, it is difficult for a lot of students to think otherwise, as convicted as they may be in the contrary. So many people saying the same thing cannot be wrong. I was sitting at the family dinner table the other day, discussing the qualifications of Malaysian opposition leaders (comparing the qualifications of Elizabeth Wong and Khalid Ibrahim, to be precise), when someone defending Elizabeth Wong said, “Elizabeth Wong is highly educated … Khalid Ibrahim is just an entrepreneur”, as if being a successful entrepreneur who change lives on a daily basis is a lesser accomplishment than writing complicated yet fundamentally useless dissertations. There seems to be a stigma attached to business in general – not that it is low-level or pedestrian – but that it is simply not a viable career option.

Yet I suspect that the realisation that self-employment is infinitely superior to being employed by someone else is not one that hits a small proportion of working adults. Additionally, I suspect that most people also know that the road to rewarding self-employment is not exactly a path of least resistance in life. Because of this, instead of accepting that economic self-sufficiency is vital to one’s growth and happiness and then devising a coherent plan to acquire, master and apply the skills of financial independence, many unhappy employees attempt to justify their inaction by pointing towards the fact that they can make more by working for someone else than they ever can by working for themselves: “I make a lot of money working for a big corporation, and that makes up for the lack of freedom that I experience”. In other words, they try to convince themselves that abundance in one area will compensate for inadequacy in another. But can it really? Financial emoluments are one thing; freedom, choice and liberty are another. Both are necessary to sustain a happy, productive working life.

The more experience I gain in life, the more convinced I am that the only way to gain true career and personal fulfillment is through self-employment, to assume full control of your destiny by reaping the profits from hard work and correct decisions and by taking responsibility for mistakes and incompetence, and then strive for financial freedom, which I will explain later. How to start from scratch, then, is naturally the next question, but one that I am, admittedly, still ill-equipped to answer. The common psychological maxim, “change must come from within”, is somewhat helpful as a starting point, in that we have to somehow undergo several paradigm shifts and earnestly believe in the supremacy and necessity of self-employment. Said paradigm shifts are crucial in helping us see our crippling inadequacies (that means forgetting our sexy grades or fancy job titles that appear on our business cards), because, as taught by Dr. Phil McGraw, “you cannot change what you don’t acknowledge”. Steve Jobs told students to “stay hungry, stay foolish”, a quote that I found extremely applicable when making the shift into any new area in life.

Once self-employment and financial independence are achieved, a worthwhile financial goal to pursue is financial freedom. Financial freedom is a higher accomplishment than financial independence. It is also a state that many will never attain; not because they cannot accumulate enough wealth, but because they do not have the strength of character to synchronise their burgeoning needs and desires with their cash flow situation. Financial freedom is not about generating greater passive cash flow more than it is about knowing how to derive maximum utility and satisfaction from a set amount of cash.

In finance, people often talk about the magic goose and its golden eggs. Consumers are people who eat the goose directly. Short-term investors are people who care for the goose until it is fatter, then eat it. Long-term investors care for the goose and eat its golden eggs, while longer-term investors care for the goose, wait for the golden eggs to hatch and eat the goslings. People who have attained financial freedom, on the other hand, do what longer-term investors do, but they also control their appetite, such that there are always more golden eggs and magic goslings than hungry stomachs.

The world today is rapidly changing, such that the old definition of financial independence can no longer sustain new expectations of freedom, self-determination and happiness. My advice to those blessed with the right endowments is to shake off the complacency now, look closely at the surrounding harsh realities and do something before it is practically too late.

(written 12 January 2010)

angel7030 SG

OMG, financial Independent is a term use for independent director in any board of directors of any organisation, he/she representation in the board is to act as a 3rd party independently on the financial aspect of the organisation, kind of like watchdog over corruption.