You might think of financial freedom as a far-off phenomenon that you MIGHT reach in retirement. But what if it were more achievable than you realized? What if you could be financially free with a few simple steps in a few years?
Breaking down financial freedom into simple steps can help you realize how easy it is to achieve your goals of living financially free.
Level 1 – Being Realistic
To be financially free, you must be realistic with yourself. Sure, you could have lofty goals, but what good are they if you can’t reach them?
The first step in feeling financially free is, to be honest with yourself. Then, take inventory of your current assets and where you want to be 5, 10, and even 30 years from now.
This step can be eye-opening, but don’t leave any stone unturned. Check your credit, look at your bank account balances, categorize your spending, and total your credit card debt. An honest view of your current financial situation will set you up for the future.
Level 2 – Standing on your Own
Most people start on level two or beyond. So, for example, if you live on your own and don’t rely on public assistance, you’re on level two.
This doesn’t mean you aren’t struggling financially, such as living paycheck to paycheck. You might have too much debt or not quite have a reliable budget. The key is that you’re out on your own and ready to take the following steps.
You’ve taken the most challenging steps, getting out on your own; now it’s time to learn how to put those steps into motion.
Level 3 – Building your Savings
You’re on level three when you get the hang of not living paycheck to paycheck. At this point, you might have a small amount of savings so that when an emergency occurs, you don’t have to choose between paying your bills and taking care of the crisis.
You might not have much saved at this point, but something is better than nothing. At this point, aim to have $1,000 saved in an account you only touch in extreme emergencies. This isn’t money to spend because you want to, but expenses you must cover because of a crisis, like a car accident or medical emergency.
Level 4 – Stability
When you reach level four, something big happens. You have saved enough money to cover emergencies, not just minor crises.
You’ll have three to six months of expenses saved at this point. So, for example, if your total monthly expenses (necessary expenses) are $3,000, you’d have $9,000 – $18,000 saved. It sounds like a lot of money, but you can achieve this goal if you save a little at a time.
Your emergency fund is there if you are unable to work. For example, if you lose your job unexpectedly or cannot work due to illness, your emergency fund can carry you through these times while you figure out a plan.
A key way to achieve this level is to automate your savings. Create a budget with room to save 10 – 20% of your income monthly. If your employer offers direct deposit, allow a portion of your funds to go directly to your savings account; just make sure it’s a savings account separate from where you keep your checking account, so you aren’t tempted to spend it.
Level 5 – Options
At Level five, you have options, including taking time off work if that’s what you desire. But to reach this level, you’ll need two years of expenses saved. Again, you can accomplish this by making your money work for you.
Passive income is the key. You earn it by investing your money and letting it compound, aka not withdrawing your earnings but instead reinvesting them. A well-diversified investment portfolio, including the stock market, commodities, real estate, and bonds, can help you achieve this goal.
The key is to have a long-term investment strategy. Don’t ‘day trade’ or make your investments short-term. Instead, invest in assets you can keep for the long-term and that offer dividends that you can then reinvest.
When you reach this level, you can start doing what you want, whether that means traveling the world for a year, taking time off to spend with your kids, or living abroad.
Level 6 – Financial Independence
You can live however you want at level six and no longer work. You have enough money invested and saved to last you through retirement, living the lifestyle you want.
You’ll need to calculate your financial independence ratio or the number of living expenses your passive income can cover. Try living off the dividends earned and not your principal yet, especially if you retire early.
Try keeping your career or at least a job until you can cover 100% of your living expenses with passive income, leaving your retirement funds for when you reach the actual retirement age.
Level 7 – Abundance
At Level seven, you’ve reached the holy grail of financial independence. You can do what you want, spend what you want, and not worry about what you can afford. While you should still make smart financial choices, the world is your oyster at this point.
The seven levels of financial freedom are easier to reach than most people realize. You can slowly climb the ladder to each level, achieving the optimal goal of financial independence and early retirement with consistent steps.
It all starts with taking inventory of your finances, setting goals, and then creating the steps to get there. It won’t happen overnight for anyone, but with consistency, you can reach a level where you are comfortable and can comfortably care for everyone in your life.
Determine what level you are at today and create your plan to achieve financial independence with every step you take. Before you know it, you’ll also find yourself climbing the ladder of economic freedom.