Ep.44 - Are You Independently Wealthy or Merely Financially Independent? (3 Minute Read)

Read Time: 3 Minutes.

Earlier this year for the first time, I heard the phrase, "Independently Wealthy", from a colleague at BuzzFeed. Ever since, I started noticing it come up again and again in news articles, Reddit and elsewhere. What exactly does it mean and how is it different from financially independent? Well, you can find out by taking the one-question test to see how close you are to being financially independent or independently wealthy. 

THE FINANCIAL INDEPENDENCE TEST

DO YOU RECEIVE ANY FINANCIAL SUPPORT FROM OTHERS? 

Financial support typically comes in three forms: free/subsidized housing, cash, and borrowed money. So ask yourself, do you live at home? Do you receive money from family or friends? Do you owe anyone money? 

If the answer is no, then you are financially independent. You are pretty much taking care of yourself by living within your means.

THE INDEPENDENTLY WEALTHY TEST

DO YOU 1) RECEIVE ANY FINANCIAL SUPPORT FROM OTHERS AND 2) INCOME FROM EMPLOYMENT?  

You can be financially independent without being independently wealthy, as independently wealthy is in a higher rung of the ladder. 

If the answer is no to both questions, then you are independently wealthy. Independently wealthy is reached when you are on your own, and you have either saved enough or have enough passive income that you don't need to work at a day job anymore. 

WHAT DOES IT TAKE TO BE INDEPENDENTLY WEALTHY? 

Savings Route: The question is basically, how much do I need to have saved before quitting my job? Here is the answer. You need 300 times of your monthly spending saved, because the rule of thumb is if you withdraw 4% of your savings, you should be able to live indefinitely. For example, if you spend $4,000/month for everything, you need to save $4,000 x 300 = $1,200,000, before you quit your job. You can easily find out how much you spend, by signing up for Mint.com (not sponsored), and track the average monthly total spending in the past 6 months.

Passive Income Route: If you make more money through passive income than you spend every month, then you are also independently wealthy enough to quit your day job. Passive income tends to fluctuate, and it typically comes from stock investments, earning interest by loaning out money, or rental income. For example, if you have multiple rental properties, and collect $5,000/month net, and your cost of living is $4,000/month, then you are independently wealthy, because you don't need to have a day job. 

 

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