The Spectrum of Financial Dependence and Independence

“I did not intend to get rich. I just wanted to get independent.” – Munger

Place yourself, your business, and other people you know, on this list.

Level 0: Complete financial dependence on the kindness of strangers who have no vested interest in your success. Panhandling when unable to work, or companies reliant on raising money from first-time investors who don’t care if you fail.

Level 1: Complete financial dependence on people who want you to succeed because they like you and their reputation is attached to your success. Children under age 15 – supported by their parents and generally too young to work – fall into this category. So do companies backed by friends and family who don’t intend on getting their money back.

Level 2: Complete financial dependence on people with a vested interest in your financial outcome. Unprofitable-but-promising businesses backed by investors who could earn a meaningful return on their investments, and are thus likely to keep supporting you.

Level 3: Ability to partially support yourself by adding value for others while still somewhat reliant on external support. Young people who work but rely on their parents to support what they consider basic lifestyle necessities. Or companies that could realistically be profitable if they changed their cost structure, but continue to raise money from investors to fund growth.

Level 4: Ability to fully support yourself by adding value for others, but value that is marginal and easy to replace. This is a common category for both people and businesses. It is grinding and tenuous. It smells like independence, but a boss or customer still owns your day and can dictate your future. Your future relies on their decisions.

Level 5: Enough savings to cover run-of-the-mill problems. You can endure hassles that every person or company should expect to experience on a regular basis, without getting wiped out.

Level 6: Enough savings to cover large, unforeseen problems. You still rely on your boss or your customers to get by month to month, but if a crisis struck you’d probably be OK for a reasonable period of time.

Level 7: Retirement savings, education savings, and avoidance of consumer and auto debt. You still rely on bosses and customers, but you can foresee a time when your current savings will open up a new level of independence for you and your family. This is the most realistic goal for most people.

Level 8: The ability to pick a job, or specific customers, that avoids the most egregious examples of bullshit and unnecessary hassle in your life. You still rely on bosses and customers, but have the freedom to say, “No, not you. I’ll find someone else,” when you get too frustrated.

Level 9: Becoming comfortable enough with your social status that you don’t feel the need to flash your peacock feathers with expensive consumer goods whose only value is in signaling. The inability to do this is a hidden form of debt and dependence that exists, and it piles up on people who mistakenly think they’re wealthy enough to be independent.

Level 10: The ability to say no to banks, whose debt you don’t need, including mortgages. Debt can be cheap capital but it keeps you beholden to others, owning a piece of your future decisions and cash-flow needs.

Level 11: Few realistic situations would cause you, your company, or your family to be pushed back below Level 5. You could support yourself for a year or more off your liquid savings. It’s the first true stage of independence. You can now say “No” to almost anyone, with high odds of recovering from the repercussions.

Level 12: Interest and dividends cover more than half of your living expenses. Most of this independence is owed to a slim lifestyle, rather than huge assets. You realize that lifestyle desires compound faster than almost any asset.

Level 13: Your assets and their reasonable return expectations will cover basic living expenses for longer than your life expectancy. Congrats. You are no longer reliant on bosses or clients. You can deal with them if you want, and you probably will. But only if you want, when you want, with who you want. Which feels good.

Level 14: Your assets cover above-basic living expenses with assets and their reasonable return expectations. You can define “above-basic” however you want. Varies by person. Remember what Chris Rock says: “If Bill Gates woke up with Oprah’s money he’d jump out the window.”

Level 15: Independence lets you do and say what you please, unconcerned with other people disagreeing with you, since you don’t rely on the support or opportunities they could offer.

Level 16: Meaningful philanthropy is the only reasonable way your assets won’t compound faster than you spend.

This, to me, is one of the most important topics in finance. Everyone’s different. But while almost everyone can adapt to their stuff, having control over your time through independence will always feel great when you have it and always be a miserable burden when you don’t.