Financial independence is ... Definition, examples and formulas

Financial independence is a pretty serious topic. What milestone can be considered its achievement? How to achieve it? Is there any collected material in the form of a plan? Is financial independence difficult? What will it take to be a free person? All this will be considered in the framework of this article.

general information

Begin with a definition. Financial independence is the highest level of well-being, during which a person no longer has to rely on the amount of available funds to satisfy his own needs and requests. Also often used as a synonym for freedom. What makes this situation? Financial independence is ensured if a person receives income from two or more sources. Additionally, the company will also be considered as part of the article, but more on that later. Back to our man. In the described situation, income should exceed costs and provide an increase in tangible and monetary assets. The optimal situation is when the sources of funds can work in a passive mode - that is, without human intervention (or with minimal).

To get financial independence, most people have to go a long way. It depends on what condition the person has at the moment. The lower it is, the more difficult the path will be. Most often, it takes years (or maybe even decades). Pass it quickly does not work. Only with aspiration, perseverance, constantly overcoming difficulties and gradually strengthening one’s position can one end up with financial independence and relax relatively calmly. Why such a weird wording? Why is the word “relative” mentioned? The fact is that the availability of financial freedom does not mean a complete departure from business and the possibility of uncontrolled squandering of money. No. It will be necessary to monitor and manage your assets. However, those who achieve financial independence can handle their funds very well.

The path to freedom: the first stages

If a person is in a debt hole, then a quick transition to independence is unlikely to succeed. Let's look at the phases through which we have to go:

1. First step. Suppose the current location is a financial hole. The first thing we need to strive for is to move to a state of instability. To do this, pay off debts. This is achieved by work in two directions: austerity and an increase in active income. In the first case, everything will have to be reviewed. Alcohol? We become teetotalers and do not use at all. Cigarettes? Similarly. Entertainment? Well, let's do simple walks. We keep track of expenses and income. All received funds are sent to pay off debts. In parallel, we are working to increase active income. This can be achieved by changing jobs to a higher paid position, by looking for additional part-time jobs, a second job and so on. And that's all, no other options. You should not invest the last money in various dubious and risky projects that promise superprofits. So, most likely, the pit only worsen.
2. Second phase. So, we managed to achieve a state of financial instability. There are no debts at this stage, and incomes are approximately equal to expenses, but at the same time slightly exceed them. It’s not worth relaxing. It is enough to stumble and take one wrong step, and the pit will return immediately. Now our goal is financial stability. At this stage, it is necessary to continue to increase active income, create reserves and savings, and also learn to plan the budget competently and efficiently. At this stage, the first passive income appears, a good example of which is interest on bank deposits. But, most attention should be paid to the development of sources of replenishment of the personal budget. Reserves act as an airbag that supports us in force majeure circumstances. Savings are used to strengthen the tangible asset base. Proper planning allows you to increase the speed of achieving the goal.

The path to freedom: the last stage

So, the final phase of the transition to financial freedom. Here stability is replaced by independence. Very often this is a transition from active to passive income. In this case, attention is paid to:

1. Creating capital. In fact, this is the preparation of highly mobile products.
2. The creation of sources of passive income. We can say that a person becomes an investor. I would like to draw the attention of readers to one very important point: sources. In plural. The more there will be, the better. Why? The fact is that investing in one project, especially in the conditions of our unstable economic and political situation, is a very risky action. Therefore, sources must be diversified to the maximum.
3. Gradual transfer of emphasis from active to passive income. Gradually, with the growth of passive sources of income, they will occupy an increasing part of the income. But, at the same time, it should be borne in mind that if a certain work brings pleasure, then you can safely continue to do this.

This is what the path to financial independence looks like. There are necessary tangible assets, cash and opportunities. All that remains to be done is to ensure the competent management of capital and personal finances due to the constant increase in monetary and tangible assets, as well as passive earnings. If you start not with a pit, but with a level higher, then the path will be shorter. In addition, the characteristics of individuals can add specificity to the process of its implementation. For example, since the abolition of the Bretton Woods system, the real value of gold has doubled. Therefore, if someone wants to have a slightly liquid, but reliable asset, he can buy a few bars or gold jewelry for his soulmate (if he is sure that she will not leave him). If you study all this in more detail and analyze all the possible and affordable options, then you can easily see that there are ample opportunities to achieve your own monetary freedom.

Is there a good book on this topic?

Yes, you can recommend the work of Bodo Schaefer, "The Path to Financial Independence." Why a book, if all general ideas can be placed in an article? And here the question arises of how much time is devoted to the thought process aimed at achieving financial independence. It just seems like the game is not worth the candle. Here, for example, how long does a person usually think about improving well-being? In the best case, a couple of minutes a day, or maybe once a month. And if you think about it for a few hours? And to devote time to this, not looking up from the book “The Path to Financial Independence”. Bodo Schaefer, moreover, is a rather experienced person in this regard, who considers a large number of hidden mechanisms of our psychology. Some readers will constantly say to themselves: this is obvious and understandable. But, even in this case, you should continue to read the book. Why? That's right, because during this process a person thinks about his own position and how good it is to be free. Bodo Schaefer's “Path to Financial Independence” allows you to concentrate on this thought for a couple of hours. Of course, this is far from the only book of this kind. Besides her, there are many others. But, yes, you should start with something, right? And it is desirable that the first experience be positive. Indeed, you can say about many books that when you read them, you understand that all useful thoughts can be put into several sentences. While the financial independence of Schaefer in this regard is a very good option.

What about the enterprise?

Commercial structures and their future are pretty much dependent on current sustainability. And it is directly influenced by the financial independence of the enterprise. What it is? This designation of the state of affairs of the commercial structure, which displays the share of borrowed funds in the capital of the company. The factors help to study the situation. Thanks to their dynamic analysis, you can understand what the situation is, and also make a forecast regarding the future. The value of the financial independence ratios is a reflection of the situation in the enterprise. Let's look at them in more detail. So:

1. Ratio of financial independence and autonomy. It is used to characterize the share of the company's equity in available cash resources. Determines how independent the firm is from borrowed funds. The optimal value is considered to be greater than 0.5.
2. Financial risk. The value for it must be less than one. If the amount of borrowed funds is greater than their own, then this indicates that the company is not stable enough.
3. Capitalization. The peculiarity of this coefficient is that in an optimal situation, its constant growth should be observed. Reflects the level of capital created in the processes of business activities.
4. Immobilization of long-term debt. It is used to detail the system of financial resources, during which the emphasis is on the long-term aspect of formation.
5. Maneuverability of equity. Shows which part is used to finance current activities. Must exceed the value of 0.3.
6. Interest payment coverage. Used to reflect the relative profitability of loans. Shows how many units of profit the company receives per unit of borrowed funds.
7. Dividend load. It characterizes the policy of cash payments to investors and owners. Displays the actual amount of dividends per ruble of invested funds.

The most generalizing here is the coefficient of financial independence and autonomy.

Separate nuances

Before rushing to calculate the value of indicators, it is necessary to understand several important points. First, there are no unified unified strict standards for the listed coefficients. A lot depends on the conditions in which you have to act:

1. Accounting policies.
2. Turnover of funds.
3. Industry affiliation enterprises.
4. Turnover of funds.

Let's look at a small comparative example. As a working material we take the financial risk coefficient. For manufacturing enterprises, it is recommended that it does not exceed a value of 0.15. For mixed - already mentioned 0.5. But for trading companies, it can be several units. Especially they love to use various large objects located on thousands of square kilometers of area, for example, supermarkets. Therefore, acceptable indicators are established only using spatio-temporal comparisons. Moreover, if the financial independence ratio is calculated from the balance sheet, then the modest fact that the data may be partially curved or rigged should be taken into account. Therefore, you must carefully monitor all important points.

Property analysis

Using ratios is far from a single way to assess the situation with the enterprise. Analysis of financial independence can be conducted on the basis of property status. In fact, the most interesting is capital, which is already transforming in a minimum amount of time into another type of resource. So, it can turn into such benefits:

1. Labor power.
2. Means of production.
3. Time.
4. Money.

Capital goods that are displayed in the asset balance sheet of the company and determine its current property status. The analysis is carried out in two directions:

1. Inner. According to the content of articles, data of working capital ratios, payment schedule, notes.
2. External. In this case, attention is paid to the dynamics (growth) of active articles.

This approach allows you to thoroughly research the situation with the company and determine the real financial situation, the degree of influence of borrowed funds, as well as approximately estimate how much it can exist in the absence of external cash receipts (investments, loans, loans). If it is possible to achieve financial independence, this ensures the stability of development and economic freedom of action. Nobody presses anything at the enterprise; conditions are not created for the worsening of the situation. And this, in turn, provides long-term financial independence. Under such conditions, it is much easier to reach new heights. In addition, data of this type can easily be used to convince potential and existing investors about the good position of the enterprise.

About autonomy coefficient

Previously, indicators of financial independence were considered. Among them, there is one which should be given closer attention. This is a coefficient of autonomy. For him, we will consider the formula. Financial independence can be either assumption or firm certainty. The second option requires reinforcement in the form of mathematical calculations. The general formula is as follows: equity and reserves / total assets. To simplify practical use, let's look at how to work with balance sheet data. In the old way, you need to divide line 490 by 700. In a new way, 1300/1700 is already going on. By such simple mathematical manipulations, you can quickly get the required value. As you can see, the autonomy coefficient is at the same time easy to calculate, and allows you to get an idea of ​​the selected enterprise policy without getting to know a lot of information.

What does the data mean?

The regulatory restriction, as we know, is 0.5. Moreover, the higher the value obtained, the better the current financial condition of the enterprise. To deepen the analysis, its value is compared with what is available on average in the industry. If this coefficient is close to unity, then this suggests that the pace of development of the commercial structure is constrained. Indeed, if you completely refuse to attract borrowed capital, then the organization loses the source of financing the growth of its assets, due to which it is possible to increase the income received. At the same time, there is a plus in this. So, this situation can significantly reduce the risks of deterioration of financial solvency in the unfavorable development of the current situation. What are the benefits of maintaining it above 0.5? High financial stability allows you to look confidently into the future. If all creditors at the same time want their obligations to be repaid, the company will be able to cope with this requirement. If the ratio is less than 0.5, then asset growth is possible, but they will most likely be acquired in debt.

Conclusion

So we examined what constitutes financial independence. This is the first step towards gaining freedom. At the initial stage, there are always many who wish, but only a few go further. And no wonder. After all, if you want to become financially independent, you need to work hard for a long time. This is the path for at least years. No need to console yourself with the illusions that you can ensure your own comfortable existence in a few months - there will be less disappointment later. But those who can overpower it will not only receive a reliable financial basis for their activities and lives, but also temper their own will, accustom themselves to monetary self-discipline and make sure that everything was not in vain. And what to invest in:

1. Real production.
2. The scope of services.
3. Financial assets.
4. The property.
5. Patents and inventions.

Everyone decides for himself. But, at the same time, one old Latin proverb should be remembered: "Victory loves preparation."