Financial literacy and financial independence share a relationship which includes the knowledge and skills necessary to make sound financial decisions. Financial independence is the attainment of a level of assets and income that would allow you to live for the remainder of your life, free of financial concerns, without working or supplementing your income.

Both exist on a spectrum; you can have a little financial literacy, or you can have a lot, you can have no financial independence, or you can be completely financially independent. Let’s explore those ideas a little further.

What is it?

Financial literacy is a combination of knowledge and skill; sometimes referred to as financial capability. Knowledge alone doesn’t make you skillful; you need to apply the knowledge in the real world to gain skill. Much as watching a few online plumbing videos doesn’t make you a plumber, gaining financial knowledge does not in itself make you financially literate.

Skill comes from applying knowledge.

Financial independence can be thought of simply as the point where retirement is affordable, and work is optional. But there are various levels within those bounds. Retirement could, for example, be affordable if you don’t do anything, which is not the retirement most people aspire to.

It would make more sense for us to think of financial independence contextually, a point where you can afford the retirement lifestyle you want, free from financial concerns. Free from financial concerns warrants its own list, including:

  • Ability to do what you want to do
  • Free from concerns of medical costs
  • The ravages of inflation
  • The fickleness of markets
  • Unforeseen circumstances that may arise

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In context, financial independence has levels: one where work is optional, but your desired lifestyle isn’t yet met. This is still a major accomplishment, but not the place to stop. If you have built the resources where the retirement you want is affordable, and work is optional, then you are truly financially independent.

Goal of Financial Independence

This can be built into goals, first shooting for basic financial independence, then a comfortable level of independence, then true independence with the lifestyle you desire.

We can see that achieving financial independence doesn’t mean the same thing as retirement does. Many people retire without being able to afford retirement — they’ll need to sacrifice to get by. Many people achieve financial independence and don’t move directly into retirement.

They do, however, gain financial freedom, which is often the unexpressed goal.

Participants in the financial independence retire early (FIRE) movement may or may not plan to fully retire when they achieve financial independence at an early age. Some may choose to do different work and gain the incredible freedom that comes with being financially independent and knowing that you do not need to work, and never need to do work that you really don’t want to do, not ever again.

That, for many people, is the big attraction, the work and lifestyle freedom that comes from being financially independent, freedom of where to live, of how to live, of where and if to work — that’s what makes FIRE’s sacrifices worthwhile.

Goal of Financial Literacy

Financial literacy’s spectrum begins with a foundation. We learn first the basics, things like budgeting, the time value of money, risk versus reward, and techniques of diversification and asset management.

We start with the things that enable us to hold ground: an emergency fund, adequate protection. Then we move forward to the more glamorous aspects of financial wellness, investing, and building wealth. But we need the foundation first, or what we build will be at risk. 

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We gain skill by doing, but only by doing thoughtfully, with intent. Knowledge without action garners us no gains; action without knowledge may produce undesirable outcomes. We need knowledge to meet us where we are — sufficient for the task at hand — and prudent action, informed by the appropriate knowledge. Financially, we do need to learn to walk before we run.

We work with financial knowledge and seek financial independence within the economic system. The system changes over time, usually slowly, sometimes disruptively. We cannot rest on our laurels; we must keep pace with changes in the environment, changes in knowledge, seeking out what serves us best now and for the future.

There’s a lot, but it need not be difficult.

We learn to walk by steps. We need to focus on the next piece of knowledge we need or the next action to take.

And we need to do that in the context of where we want to get to, whether that be financial independence or the education of our children or some other goal. The principles are the same: We need the knowledge, we need to take appropriate action — based upon that knowledge and the details of our situation — to best move us in the direction of our goals.

The Bottom Line

Financial literacy and financial independence share a relationship. Financial literacy is a set of tools and skills that will help us to achieve financial independence. The likelihood of achieving financial independence without financial literacy is not good; some will get there by accident, but few. Financial literacy can enable you to take control and make achieving your goals a definite instead of a maybe. Financial literacy is, ultimately, financial freedom.

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