Something has been bugging me lately and when something is bugging me I go away, do some research, do some thinking and write it down. The question that I have been pondering is the following: what is the difference between financial independence and financial health?
Now, most literature on personal finance will have us believe that financial independence is the ultimate aspiration; that achieving financial independence is the cherry on the cake(s) of our existence, our relationship with money and our happy and secure future. So I decided, based on the reading and thinking I have been doing, to see what the main features of financial independence are and check how they compare to those of what I understand to be financial health.
It seems to me that financial independence is about:
- Having enough and some more. This means that all your needs and wants can be met and there is still some money left. What is ‘enough’ is an entirely different matter, I believe, and the quest for financial independence normally succeeds rather than incorporates it.
- All this is from passive income. American personal finance literature emphasise savings and investments. One shouldn’t forget that passive income is also generated by royalties (mine are all of £200 per year), some websites, inventions, licences etc.
- Not owing anything to anybody (no negative wealth of any kind). This one is pretty self explanatory – no negative wealth, none at all. No consumer debt, no student loans, no mortgage.
- Being independent from financial institutions. This follows directly from the previous point – if one has no negative wealth of any kind they are broadly speaking independent from financial institutions. Apart from the fact that we keep our savings and investments in financial institutions as well.
- Being independent from employment structures. Having more than enough from passive income streams means that one doesn’t have to be in employment. This doesn’t mean that one is not working, though.
- Having choices about important areas of life. Having more than enough from passive income means that one can choose whether to work, where to live, how to live, when and where to travel etc. In brief, life design kicks in big time.
Financial health, on the other hand, I believe, is more about:
- Different balances. And these are not only financial balance sheets but also the balance between life and work etc. Probably a shortcut is to say that financial health is about being ‘centred’.
- Reflexion and understanding. It seems to me that this is an absolutely essential part of financial health. It is about understanding your life and understanding your position in relation to other forces in your life, like your employer, your bank, your family, your partner. This is also about working out what is your ‘enough’, what is the life you want to lead and what are you prepared to do to get it.
- Feeling and self awareness. How do you feel about your position in the world? Financial health is about moving away from feeling bad about it and starting to feel, well if not happy then contented about it. This usually needs self awareness; and once you start examining yourself you may be surprised by the extent to which you have absolutely no idea who you are (even less what you want). I certainly was surprised and had to meet myself; and learn not simply to live with but to love and respect myself that little bit more.
- Positive mentality. In fact financial health is about positive mentality and not only about finance. Does your heart start beating faster when your financial statement drops in your mail box? Do you think ‘why would they have it when I don’t’? If your answer is yes there is some work to be done on your mentality.
- Having enough to meet all obligations. Being financially healthy means that one has enough to meet all their obligations; including any negative wealth. And that there is a bit left after that.
- It doesn’t matter what kind of income. Being financially healthy is possible irrespective of the kind of income (it doesn’t have to be passive income). It is important, however, to have more than one source of income – one is a very unstable number.
After all that, it seems to me that financial independence and financial health are different mainly in two respects: one is the kind of income and the second one the more reflexive connotations on the latter.
One can be financially healthy without being financially independent but I doubt one can be financially independent without being financially healthy.