Financial Freedom – Steps and Ladder
To reach true financial freedom, you usually need a plan to get there. Our Financial Goals can sometimes seem so big and overwhelming that they feel almost unattainable, especially when we’re just getting started on our own roads to financial independence. And this is where we can tend to get stuck.
We are often bogged down by our day to day living and distractions that reaching financial freedom seems like a pipe dream, way too difficult to really set our hearts on. But if you think of reaching financial independence in bite-size stages, we find that the goal becomes more achievable and realistic. That also makes the journey less overwhelming. Our community friends find it helpful to breakdown the goal of becoming financially independent into smaller and more manageable levels of financial independence, not only because it makes it easier for us to track our progress, which in turn helps us to stay more motivated throughout the whole process, but also because it helps us to get over the initial hurdle of starting a big task.
The point is that every action, no matter the size, is likely to lead you closer to financial freedom. Moreover, the stage wise pursuit of financial independence also lead you to ingraining good money habits – a core part of smart money management. You can plan, start and rejoice as you attain your levels from the first level to the top level in your life journey.
We think of financial freedom as having the ability to make certain choices without worrying about being able to financially sustain yourself.
So where does it all start?
Level 0 is Financial Dependency
is when your debt payments and other living expenses are greater than your own current income. This means that in one way or another, you’re dependent on someone or something else to help you pay for all your bills. Or if you happen to be a kid and don’t actually have any bills, you may need someone else, usually your parents to pay to put food on the table and keep the lights on and have a roof over your head. This is the level that all of us start and it is referred to a level 0 because as a financial dependent you obviously don’t have any financial independence. 1. Dependent
At this level, things look difficult, going is tough and you might be unhappy with your financial position.
You are likely financially dependent on others. And at this state, you can probably only continue on in this way in the short term. The sooner you realize this, and make attempts to get out of this, the better it is for you.
Level 1 is Financial Solvency
is where your current on all your debt payments. You can meet your financial commitments and other living expenses without any outside help. Solvency or “survival” is when your outgoings and expenses are lower than your earnings. In this stage, you’re likely able to meet your financial commitments, pay all your bills and not rely on someone or something to help you cover your expenses.
Level 2 is Financial stability
is usually defined as when you have built some sort of emergency fund in addition to being financially solvent. Once you’re able to consistently meet your financial commitments, have paid off some debts, and you’re able to keep your expenses down, then you can start saving. First for your emergency fund, then for your longer term growth. But you’re probably not debt free yet. And that’s okay ! You may still have some significant debts like paying your student loan debt or a home loan, which you’re chipping away at these big debts. Student loans help you build a strong professional foundation, and thus boosting your future income potential. Home loan is again a good investment hopefully in a stable appreciating asset that has immense boost in your financial confidence.
Level 3 is high interest debt freedom
and it’s defined differently depending on who you ask. For some, it being completely debt free mortgage and everything for others, it’s being just free of the high interest debts like credit cards, but you still may have a more. Or some other debts like student loans and for some others it’s paying off all of your debts except for your mortgage, but your credit cards, student loans, car loans, all that stuff is paid off. The idea is that your loan repayment options should not chip away the earnings substantially.
Level 4 is Coasting to Financial Freedom
Level 4 is known by several different fond names. The main one that we have seen is coasting financial independence, barista financial independence and sometimes it’s also known as freedom from employer. The idea of it being coasting financial independence. You reached the level of coasting financial independence when you could if you wanted to step down from a job that may be higher paying but also, be either less satisfying or more stressful, or both into a new job that may be lower paying but more enjoyable or less stressful, or both. You have managed to save a very decent sum of money that would be able to provide for the later years of their retirement. Once you have built your emergency fund, we think that it’s time to consider investing. Hopefully, when you have built a solid investment base, you aren’t relying on your income to cover your basic expenses. You may successfully be building and managing your wealth, and be on the path to earning your financial freedom. This is time to start thinking about enhancing your personal networth. Sure money has grown, even if they don’t put any more money in there for all this person would need to do is make enough money to get to age 60 or 65 or 70 or whatever the numbers work out to be for them when they’re going to start withdrawing the money from their investments. So in a sense, a person who achieves this level of financial independence worked really, really hard and was very frugal. Usually in the first few years of their career so that they could coast their way into retirement.
Level 5 is Financial Security
is effectively when your cash flow from your investments has grown to large enough that it can provide for your annual basic survival expenses. Now I say survival expenses because I do differentiate that from living expenses. Survival expenses are just the basic things you need to survive. Food, water, shelter, utility bills, some form of transportation, clothing and probably insurance. Basically this does not include things like cable subscriptions or OTT bills. It is purely survival expenses, so this probably isn’t the ideal spot to retire, and I certainly wouldn’t want to retire at this point, but it is an important level to keep in mind because it does give you security, hence the name. And if you were on level 5 and got fired today, you would be OK. You could easily survive until you found another job. So this is essentially the first level of financial freedom ladder that really gives you the Peace of Mind, even if the lifestyle should you have chosen to live it may not be the most lavish. It is still a good deal.
Level 6 is Financial Flexibility
is similar in many ways to financial security. Just step up. It’s when you have the ability to live off your current cash flow and from your wealth, assuming that you have a flexible spending plan that adjusts for the ups and downs. Many people say that roughly half of full financial independence which, if you’re following the 4% rule ( 4% rule means that your wealth is around 25 times of your annual expenses ) , is going to be roughly 12.5 times your current expenses have been saved, so not quite financial independence, but getting there.
Level 7 is Financial Independence
and it’s usually based on the 4% rule. You can follow the 4% rule when you have saved roughly 25 times your annual expenses. The vast majority of the time, this amount of money will be enough to allow you to maintain your current lifestyle in retirement and as a result you could be considered financially independent that are worth considering, even if not all of us are going to try to achieve them, because being at level 7 allows us to do what we wanted all along. So let’s briefly talk about those other levels.
Level 8 is Financial Freedom
which typically is defined as the cash flow from your investments being greater than financial independence and a few more life goals that you have. Life goals, of course will differ for everybody, but this could be something like taking a trip or two on nice vacations, or moving to a new place you’ve always wanted to live without worrying about expenses, investing in a few projects that you always wanted to, being generous about social impact projects, but haven’t had quite enough money to live there up until now, or whatever the case may be for you. You are free to exercise your choices and invest money in your pet projects. As is obvious, it is different for everybody. You’re going to know your own dreams better than anybody else.
Level 9 is Financial Abundance
and this one is quite simply, just that the cash flow from your investments is more than you will ever need, you could spend it if you really wanted to, but it would actually take some effort and the stuff from Level 8 doesn’t really cut into it much at all, so you could up those goals even more and still have some cash flow leftover at the end of the year. This also probably has a slightly different definition for each person, depending on who you ask? But a common number is two or even three times your financial freedom number, so that even in a bear market you shall float easily without any worry. You should have enough investment income that you have more than you need. Here your focus should be on sensible stewardship of this wealth for any beneficiaries.
So, these are the 10 levels of financial independence. It will take time to realise full financial freedom, but the peace of mind, confidence and control over your destiny, will be well worth it. So there you have it. It’s not easy to reach financial freedom, nor is it a well-travelled road by all the public. Nor will all your friends and acquaintances will decide to pursue it. But it is possible. Many people earn decent money, but never get beyond the first few stages. Remember it’s about the wise choices you make that will help you to get there. Don’t get overwhelmed by the thought of financial freedom. If you keep chugging along and make smart money choices, we think that you could get there. All the very best!