What does it mean to you to be financially free? Does it mean you have the money to travel across the world and own the nicest cars? Or does it mean having enough money coming in that you never have to work a 9 to 5 job again? The reality is that financial freedom is different for everyone however the one commonality is that it is something everyone aspires to. Now, this doesn’t mean that you should race to financial freedom to be able to step away from your business or quit your 9 to 5 job because for many these are activities that bring them meaning in their lives.
However, being financially independent has its benefits and is a great goal to work towards. As such, here are 7 simple steps to achieve financial freedom.
Before we get into the 7 steps you must progress through in order to become financially independent, I think it’s worth highlighting a few of the benefits those who reach this financial milestone enjoy. I want to share these benefits with you for two reasons. First, because the journey to achieving financial freedom can be long, knowing what awaits you at the end of this conquest will help keep your motivation high. Second, it will give you an idea as to whether this is a goal you even want to pursue. Therefore, here are three benefits of being financially free!
Benefit #1: Less Stress
As humans, we crave a sense of security. It dictates how we act and the decisions we make every day. Without that feeling, we tend to regress into survival mode, leaving no time to accomplish what we truly want. This, in turn, ramps up the level of stress in our daily lives. Imagine how it feels to live paycheck to paycheck, in a serious amount of debt, and knowing that if you miss even one paycheck you could be out on the street. Becoming wealthy isn’t always about having more zeroes in your bank account. Often times it’s about having a better mental state and by knowing your bills are covered for the foreseeable future, you will be able to reduce this mental burden and focus on more pressing matters.
Benefit #2: Control Of Your Schedule
When you’re financially free, you get to use your time exactly how you want. There is no getting up for work, no dreaded commute or useless meetings to attend. When you are financially independent you have the choice of how and when you want to work. As such, you can decide exactly how to spend your time.
Benefit #3: Ability To Take Risks
When you have financial freedom, the world is quite literally open to you. Some decide to get up and move to a different part of the country. Some end up moving abroad. Not being tethered to one location and job allows for you to take risks and adventures in life. Essentially, because money isn’t a concern, you can do the things that those who are dependent on a paycheck simply cannot undertake.
Now that you know a few of the many benefits that come with being financially free, it’s time to walk you through the 7 steps of financial freedom so you can determine which step you are currently at and what actions you need to take to reach this lofty financial milestone!
Step 0: Total Dependence
Step zero is the opposite of financial independence because in this stage, you are completely dependent on others. At one point, even the most successful and the richest of millionaires were at this stage so don’t feel bad if this is where you currently reside. With no means and no capacity to earn money, we all depend on our parents to provide for our needs when we’re young and this is the most common iteration of step zero.
However, you’re also at this step if you’re spending more than what you’re earning. You’ll know you’re here if you’ve been forced to take out a payday loan, a loan from the bank, or borrow money from family and friends to get by. Either way, this suggests a dependency on something or someone to cover expenses you simply can’t pay for.
Step 1: Solvency
Profit or savings come in once you’re able to keep your expenses down to less than what you’re earning. Solvency is the first step in the surviving phase. In this stage, you’re able to meet all of your financial commitments, pay all your bills, and you don’t rely on someone or something to help you cover your expenses. You still have loans, but you’re not adding anything new and more importantly, you can meet your payments every month.
If you’re a student, your first step to solvency is to get a job that will allow you to earn enough so you wouldn’t have to depend on your parents for your essentials. If you’re already making some money, achieving solvency can entail getting a higher paying job, doubling your income stream, or cutting down on your expenses. If you’ve been stuck in Stage 0 because of debt, then one way to achieve solvency is to renegotiate with your creditors for friendlier payment terms or a get lower interest rate so you can still meet the required payment and still have enough money left to cover all your other bills.
Step 2: Financial Stability
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. This extra money can be your rainy-day fund, a cash reserve that you can turn to when an unexpected expense crops up. Ordinarily, in stages 0 and 1, if you find yourself saddled with an emergency expense, the only choice is to borrow money, take out a loan, or fall behind on paying your bills because you have to cover the emergency instead. This wouldn’t be the case if you had some savings tucked away.
At this stage, it’s still perfectly acceptable and normal to have some significant debts. You might still be paying your student loan, or you might have a mortgage to settle every month, but you’ve paid off most of your consumer debt and there’s no need to get into more significant debt.
Step 3: Debt Freedom
I call Step 3 the Dave Ramsey step because Dave is a huge proponent of living debt-free. Even at the expense of greater returns, he preaches the prioritization of debt repayment and when you’ve advanced beyond this age, you’ll be going good by Dave. You see, at this point, you’ve established enough stability in your expenses and managed to start setting aside money for an emergency fund. Since you’ve paid off your consumer debts, the next step is to start working through the high-interest major ones. Settling even one high-interest loan can mean one less item to worry about and added savings for you. This means working to pay off any debt on investment, a student loan, or the mortgage on your car or house. In this stage, you have enough money and means not just to survive but also start thriving. You don’t live a hand-to-mouth existence. You have cash reserves that can be a good fall back during an emergency, and you’re almost debt-free. This is when the value of money is more than just a safety net and is now a tool to help you create a much better, more comfortable life. You can start to use your money for investing purposes.
Step 4: Financial Security
This stage highlights the value of a good investment. If you’ve been saving money consistently somewhere between steps 2 and 4, then you’ve put some of your money into worthwhile investments that can deliver short, medium, and long-term returns. In this stage, you should be able to enjoy the benefits of those investments. If your investment income is adequate to cover your basic major living expenses, such as housing, food, utilities, and transportation, then you’ve reached the stage of financial security.
This doesn’t necessarily mean that you can now quit your job. The basic idea is that, if for example you spend about $1,000 every month for these living expenses, then you have more than enough savings or income from your investments to cover this monthly $1,000 cost for the rest of your life. This doesn’t cover expenses on the miscellaneous stuff, the small comforts you allow yourself, and that’s why you still need the income from your job.
Step 5: Financial Independence
Between step 4 and 5, you continue earning money, and you’re saving and investing more of it until, at some point, your investment earnings are enough to cover your current lifestyle. This means your investment income is sufficient to pay for your necessary expenses AND the other miscellaneous ones, too, for the rest of your life. This is when you can now say it’s okay to quit your job and go country hopping and not worry about your expenses both in the present and the future.
There is no set or a specific amount that lets you know you’ve achieved financial independence. Because lifestyles vary, a simple man can say that $20,000 is more than enough to cover everything he would need every year for the rest of his life, but another person may need $50,000 or $80,000 to cover their basic lifestyle needs and the occasional holiday abroad.
Step 6: Financial Abundance
The last stage in the continuum is the point where you have enough for your lifestyle, both the basic and the comforts, and then still have some more that you can use on other things. You have enough surplus from your passive income that you can use it to invest in more business, buy more houses, donate to a charity, or even start one.
In this stage, we’re not just talking about smart money management, but smart asset management. How do you control these passive assets? How do you allocate the income from these different investments? Who are the people who will benefit from these assets and investments at a later time? How will they be divided or distributed to your family and loved ones? These are all things you can consider if you’ve reached financial abundance.
Now, I want to share some cold hard truth about becoming financially free and the 7 steps I just mentioned. For most people, financial independence is seen as the end goal and they give little attention to the other stages before it. This view turns financial freedom into a mirage, an impossible dream, a “financial unicorn.” Because it’s seen as almost too good to be possible, a lot of people just end up somewhere around steps 2 and 3, or sometimes 4, and never try to move beyond these stages.
But by thinking of financial independence as part of a continuum, the goal becomes much more achievable and realistic. It also makes the journey less challenging and less frustrating. You don’t have to get stuck, or worse, choose to be stuck in just stage 1. If you can manage to do away with your credit card debt, that’s great. Then you can focus on saving 5% of your income this month, but later in the year, you can try to bump it up to 10%. By next year, you can start working to pay off your student loan. The point is that each and every action, no matter how small, becomes a crucial stepping point closer to the other end of the continuum.
These stages of financial independence also lead you down a path to a basic and essential part of smart money management which is making investments. From stages 4 to 6, work and income from your job take a backseat. You are not relying on your paycheck to cover your basic expenses, and you’ve turned your attention to building and managing your investments. Every penny saved and every debt or loan settled are steps that will take you closer to the goals near the freedom end of the continuum.