Updated: Oct 5, 2022
What financial freedom looks like for each of us is different but the steps to get there are the same. There are essentially seven levels to achieving financial freedom.
Grant Sabatier is a self-made millionaire. Author of “Financial Freedom” and founder of the website Millennial Money, he is an excellent example of the FIRE movement. FIRE stands for Financially Independent Retire Early.
Here is the summary of his seven levels to achieving financial freedom:
Level 1: Clarity
The first level towards achieving financial freedom is to know where you’re at, which means having a clear sense of what’s coming in and what’s going out, essentially your cash flow.
Besides that, you also need to know your current net worth. How much do you own vs. how much do you owe?
Once you know where you are, you can decide where you want to be. Would you feel you’ve achieved financial freedom when you’ve paid off all your debt and are receiving multiple income streams? And what about your 3, 5, and 10-year financial goals?
Level 2: Self-Sufficiency
Self-sufficiency is when you make enough money to cover all your expenses without going into debt or getting help from anyone else.
Most people spend a large part of their incomes on paying down debt. Total household debt in the US exceeds $15T. The average family in the US owes $155,622.
Is your debt mainly credit card debt used to finance depreciating assets like fancy clothes or loans for cars? Which is different from debt used for appreciating assets such as a mortgage for real estate. According to the leading US digital marketplace, LendingClub, 64% of Americans live paycheck to paycheck.
It’s not what you earn but how much you spend that matters because higher-income earners are also living in debt-31% of working Americans earning over $100,000 live paycheck-to-paycheck.
Level 3: Breathing Room
Once you reach level three, you have more room to breathe. You have money left over beyond your living expenses and debt repayments.
You now have extra money to save at level three towards your financial goals, such as building an emergency fund, contributing towards a retirement fund, buying a home, or paying off a mortgage.
Level 4: Stability
If you’ve paid off credit card debt and have an emergency fund worth at least six months of your living expenses, you’re at stage 4- financial stability.
An emergency savings fund ensures your financial plans are not thrown off track by unexpected financial setbacks, such as a leaky roof, job loss, or moving to another city.
In calculating how much you need to save, consider your financial picture and prepare for unforeseen circumstances, not just your regular, everyday expenses.
Level 5: Flexibility
People at Level 5 have saved at least two years’ worth of living expenses. This can be money saved in a savings account, or some could be invested. But it has to be accessible. If you have it all in a pension at work, it is not accessible.
Having two years of living expenses accessible to you gives you the flexibility to take time off work or pursue a new venture.
Level 6: Financial Independence
According to Sabatier’s framework, people who have achieved financial independence can live solely on their investments’ income.
This money can come from a large sum of money in an investment portfolio generating income, or you have rental properties, and cash flow from the rent covers your living expenses.
To achieve this, you must invest a high percentage of your income; which may mean shifting to a more modest lifestyle to drastically lower your cost of living and cutting out extras, and plugging financial leakages such as subscriptions you rarely read.
Level 7: Abundant Wealth
Abundant wealth is that stage of financial independence that gives you the option to retire.
If you can withdraw 4% of the income from your portfolio, be assured that your money will not run out and will continue to grow as long as you’re alive.
You have more money than you’ll ever need at this level, and it is no longer essential to your day-to-day existence. As Grant Sabatier says, “If you want your life to look different, you have to make different choices,”
7 Levels to Financial Freedom
Financial freedom looks different to different people. Some people are contented with a net worth of $500,000 as long as they are debt-free. And others feel free once they've achieved a net worth of $10M. There are those who are comfortable living with some amount of debt - that's leveraged "good debt."
What we can all agree on is that financial freedom is achieved when we can make our decisions free of financial worry. And that's a place we all desire!
Written by Jennifer Thompson