Financial IQ: What is Financial Independence?

Image via WikipediaWhen you hear Financial Independence, what comes into your mind?
For me, Financial Independence is the state where we can do anything we want to / make choices, without worrying where payment for expenses will come, as we have already established various sources of passive income.  To reach Financial Independence, we need to first work on improving our Financial IQ / Financial Literacy.
Robert Kiyosaki's Rich Dad Poor Dad Cash Flow 101 game board teaches us that Financial Independence or Financial Freedom is achieved once we are able to get out of the rat race.  To get out of the rat race, we need to reach the point where passive income is more than expenses.
This is how Wikipedia defines Financial Independence:
Financial independence is a term generally used to describe the state of having sufficient personal wealth to live indefinitely without having to work actively for basic necessities. In the case of many individuals whose financial circumstances fit this description, their assets generate income that is greater than their expenses. To illustrate, a persons monthly expenses may total $1000. They receive dividends from stocks they've previously purchased totalling $5,000 quarterly, while also having an even more substantial amount of money in other assets. Under such circumstances, a person is financially independent.
A person's assets and liabilities are an important factor in determining if they have achieved financial independence. An asset is anything of value that can be liquidated if a person has debt, whereas a liability is related to debt, in that it is the responsibility of one possessing it to provide compensation. (Homes and automobilies with no lien holder are common assets)
The following are two approaches in achieving financial independence:

• Gather revenue generating assets until the generated revenue surpasses living/liability expenses.
• Gather enough liquid assets to then sustain all future living/liability expenses

It does not matter how old or young someone is or how much money they have or make. If they can generate enough money to meet their needs from sources other than their primary occupation then they have achieved financial independence. Age is potentially irrelevant with respect to financial independence — if they are 25 years old and their expenses are only $100 per month and they have assets that generate $101 or more per month they have achieved financial independence and they are now free to do things that they enjoy without having to worry about their next meal or a roof over their head. If on the other hand they are 50 years old and earn a million dollars a month but still have expenses above a million dollars a month then they are not financially independent - they still have to generate the difference each month just to stay even.
Some people think that financial independence is sustainable only if it is adopted by a small part of the population and the system will fail if a majority of the population tries to adopt it. This is because the passive income required for financial independence is derived from the active income of other people. This is roughly consistent with the baby boomer retirement issue in which the social security system is predicted to fail when a major part of the population is claiming their retirement benefits.
Robert Pagliarini's definition of Financial Independence
Financial independence is really the pot at the end of the rainbow. It's the mother load of personal finance. I sometimes am afraid to say "financial independence" because people, if they've watched any late night TV and heard "Get rich quick - no money down real estate - become financially independent", are turned off from financial independence. I define financial independence as being able to afford the lifestyle that you desire, without having to work. There are two pieces to that definition that are really important. One: the lifestyle that you desire - whatever that lifestyle may be - it might be right where you are today, or you might have some dreams and goals about where you want it to be. It's coming up with what kind of life you want. The second part of financial independence - and this is the cool part - is being able to afford that without having to work.

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