The 7 Stages of Financial Independence

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There are lots of reasons why people want financial independence. Some of the most common are:

• Escape the Rat Race—It’s getting harder and harder to make ends meet working long hours at jobs you don’t like. Financial independence lets you pursue passions or choose your own work.
• To Have More Control Over Your Life—Financial independence means you’re not dependent on your boss or the economy. There’s no worry about losing your job or struggling to pay your bills, and you can spend your time how you want.
• Spend More Time With Family and Friends—You can travel more, take more vacations, and spend more time with your family when you’re financially independent. Also, you can get more involved in volunteer work or other activities.
• Pursuing Your Passions—Having your passions in your life is easier when you’re not stuck at a job you hate. If you want, you can start your own business, write a book, or travel.
• Giving Back to Others—Being financially independent can give you the power to change the world. If you want to help others, you can donate to charities, start your own foundation, or volunteer.

This is where Grant Sabatier’s 7 levels of financial freedom come in—a roadmap for assessing and improving your finances so much that you become financially free.

To achieve your financial goals, pay your bills, and most importantly, enjoy your life, you must feel confident, independent, and secure. The problem is, how can you live with high living costs, exorbitant debt interest, and everything else eating into your wallet? However, you can build wealth, pay off debt, or save for a vacation if you follow these seven steps.

1. Clarity

If you didn’t know the responsibilities of a new job, you wouldn’t accept it, right? Financial independence is no different. Therefore, Sabatier’s first level of financial freedom is clarity, which is understanding your current financial situation and improving your financial literacy.

Gaining clarity begins with assessing your current financial situation and deciding where you want to go. In order to achieve clarity, follow these simple two steps:

• calculate your net worth
• what is your “why” for achieving FI (financial independence)

Using Betterment, You Need a Budget, or Personal Capital, you can calculate your net worth. Through these programs, you can connect bank accounts, investment accounts, credit cards, auto loans, mortgages, and student loans. In turn, this should give you a solid idea of where you stand financially.

What about your “why?”

Well, there’s no right or wrong answer. It’s really up to you. For some, they’d like to become financially independent so they can travel or spend more time with their families. Regardless, consider your reasons and write them down.

2. Self-Sufficiency

Being solvent or self-sufficient is the next step toward financial independence. To put it another way, you must be able to meet your financial obligations without getting into debt or requiring the assistance of third parties.

The truth is, living on credit will keep you in a dependence phase and one step from disaster. Why? Since a bank isn’t like your parents, it will demand repayment.

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There is still a possibility to generate financial freedom at this stage, but it is limited. For example, you can invest, review unnecessary expenses, and reduce your electricity usage.

3. Breathing Room

Here, we get a chance to take a breather. After all, if you’ve ever lived paycheck to paycheck, you know how suffocating it can be.

But what exactly does breathing room mean? Once essential expenses are covered, you have some extra money to invest in stocks or for an emergency fund. In addition, you have more wiggle room to cover unexpected expenses like a big vet bill or home renovations. Then again, you might have a few debts eating up much of your income.

Despite reaching level 3, you may still desire more from life. But those days of living paycheck to paycheck or relying on financial assistance from your parents or credit cards are over.

4. Stability

At Level 4, people have paid off high-interest debt, like credit card debt, and have saved six months’ worth of living expenses for emergencies, notes Ryan Ermey for Grow. By building up emergency savings, you ensure that unexpected circumstances won’t disrupt your finances.

“At this level, you’re not worried if you lose your job or if you have to move to a different city,” Sabatier says.

Rather than just factoring in your regular, everyday expenses when calculating how much you should have saved, financial experts recommend thinking about how your finances might look in an uncertain financial future.

“If you have a job loss, you’d make some changes. You’d probably cut your gym membership and get rid of your subscriptions, for instance,” Christine Benz, director of personal finance and retirement planning at Morningstar, told Grow. “Think about the bare minimum you’d need to get by.”

5. Flexibility

A person who reaches this stage can live with their wealth for at least two years. In this situation, you could think about changing jobs voluntarily or taking a sabbatical year.

Simply put, you have the freedom to organize your life and time according to your preferences and you are not limited to certain environments at work. Obviously, within a limit, which will define the years of financial freedom you enjoy.

Between this stage and the next, it is possible to reach a level of financial independence known as Lean FIRE (financial independence, retire early), which we can translate as “frugal or meager.” As a result, you may be able to live off your savings by stopping working. However, your lifestyle will have to change and your expenses will have to be drastically reduced.

6. Financial Independence

While flexibility is great, you can’t really kiss your day job goodbye forever. In order to accomplish that, you’d have to become financially independent. When you reach Level 6, your investments generate interest, income, and appreciation for you to sustain yourself.

These people rely on either a sizable investment portfolio that generates interest or a real estate investment that generates rental income.

As you progress through the levels of financial freedom, you’ll need to work hard. In this case, you might need to adhere to a strict budget and invest more money. The more time you have after financial independence, the better your chances are.

7. Abundant Wealth

“Every $1 invested today is worth hours, if not days, of your freedom in the future,” Sabatier writes. By investing $1 every day throughout the year, you would not just have $365. Sabatier understood that investing your money is the only way to regain control of your finances once he got broke and retired early (all within five years).

Level 6 might have allowed your lifestyle to be sustained by investments. In order to maintain a smooth day, you monitor your peaks and dips carefully.

Once you’ve reached level 7, you no longer have to worry about finances, and you have more money than you could ever need. The fruits of your labor are at your fingertips, so you can pursue your passions without feeling stressed.

However, how do you manage to pay for the daily necessities? You won’t go broke if you stick to the retirement rule of 4 percent each month from your investment portfolio.

Conclusion

If you are willing to work hard and make smart financial decisions, Sabatier says you can achieve financial freedom. Financial Freedom and The Financial Freedom Course, both of which Sabatier provides online, are two tools that he provides for people seeking financial freedom.

To move up the 7 levels of financial freedom, follow these tips:

1) Set Financial Goals

With your money, what are you hoping to accomplish? Is it your goal to retire early? Would you like to purchase a home? Are you ready to travel the world? By identifying your goals, you will be able to develop a plan to reach them.

2) Create a Budget

Every month, you should prepare a budget for how you will spend your money. Saving money for your goals can be achieved by tracking your spending and identifying areas for saving.

3) Pay Off Debt

In order to achieve financial freedom, debt is a major obstacle. By paying off your debt sooner, you can save and invest more money.

4) Invest for the Future

For a successful retirement, you need to start investing early and regularly. As your money grows, you can benefit from compound interest.

5) Live Below Your Means

Living below your means is one of the best ways to achieve financial freedom. You need to spend less money than you earn in order to achieve this.

6) Be Patient and Persistent

In order to achieve financial freedom, you must put in time and effort. If you don’t see results right away, don’t get discouraged. As long as you keep working toward your goals, you’ll eventually achieve them.

By John Rampton

The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.