Discovering the 7 stages of financial independence are going to make your financial dreams more realistic and achievable.
First, let’s review what financial independence actually means.
Simply put, financial independence is when you have enough passive income to cover your lifestyle. You no longer need to work and you can officially fire your boss.
If you’ve ever listened to the Radical Personal Finance podcast, you might have heard Joshua Sheats discuss the “7 Stages of Financial Independence.” We believe that these steps help to make financial success more realistic to normal, everyday people.
Many people think that reaching financial independence is the grand finale in the world of financial planning. However, financial independence is really just a stepping stone that you might achieve on your way to your ultimate goal, which should be “Financial Abundance.”
There are 7 stages of financial independence that everyone (even you) fits within. Here’s a quick overview:
0. Financial Dependency
1. Financial Solvency
2. Financial Stability
3. Debt Freedom
4. Financial Security
5. Financial Independence
6. Financial Freedom
7. Financial Abundance
Financial Dependency – Stage 0
The 7 stages of financial independence start with stage 0, called Financial Dependency. There is no natural number assigned to this stage because if you are currently here, you are completely dependent on someone else.
If you think about it, everyone was financially dependent at one time in their lives. Young children who depend on their parents or guardians are here. Also, some dependent adults are found here.
In other words, if you are fully dependent on someone else to pay your bills or feed you, you are in stage 0.
Financial Solvency – Stage 1
If you are in the Financial Solvency stage, then you make enough money to stay current on your bill payments.
Some of your bills may include consumer debt (credit card debt,) mortgage debt, or medical debt. Whatever the payments are, you can pay them on time. At the same time, you will have to borrow money if you have an emergency that requires money.
Financial Stability – Stage 2
Stage 2 is Financial Stability. If you are able to keep up with your debt payments AND have an emergency fund, then you are considered to be financially stable.
People who want to become financially independent have usually paid off some or all of their consumer debt in this stage. However, they still have other types of debt.
Debt Freedom – Stage 3
AHHH – Debt Freedom! The name is self-explanatory – you have paid off 100% of your personal debt. This is when the real excitement starts!
Everyone has different opinions about paying off debt, however, we believe that this stage of financial independence is one of the most important stepping stones to reach your dreams.
After you reach this stage, you will be dumping money into investments.
When you are debt-free, money is no longer about survival but instead becomes a tool. This is the time to thrive!
Financial Security – Stage 4
In this stage, you’ve made some investments that can provide enough income for you to cover your basic survival expenses. You also have a large amount of money saved for retirement.
Some of these basic survival expenses would include food, housing, and insurance.
Sometimes people refer to this stage as the “Peace of Mind” stage. Meaning, if you were to get fired tomorrow, you would still be able to survive off of your investments.
Financial Independence (FI) – Stage 5
When you reach Financial Independence, your investment income covers your current lifestyle, not just your survival expenses. For a more in-depth explanation, check out, “What is FI?”
For example:
Let’s say, two people, John and Ashley, spend $5,000 a month. That includes their housing, gym membership, travel, and all other expenses.
John and Ashley made great investments and bring in 5,000 dollars a month in cash flow from their rental property and stock dividends. Since their cash flow covers their lifestyle, they are considered to be financially independent. They now no longer have to work if they maintain their current lifestyle.
*If you want to “FIRE” (to be Financially Independent & Retire Early) you will also want to have 25x your annual income saved. “Fire” is a popular goal for people who strive for financial independence.
Financial Freedom – Stage 6
When your investment cash flow is greater than your FI number, or your cash flow is greater than your current lifestyle, you’ve reach financial freedom.
That means if you started living an inflated lifestyle (as a lot of people do) you would be just fine. Your investments could cover a more expensive lifestyle.
Financial Abundance – Stage 7
The final stepping stone in the stages of financial independence is called Financial Abundance.
Financial Abundance means that you have more investment cash flow than you would ever need. In addition, your money will most likely outlive you.
To give you an example of what amount this would look like – the “FIRE” community would consider you to have 3x your FI number saved.
At this stage, you don’t manage money – you manage assets.
How do people succeed in the 7 Stages?
Many people think that the only way anyone can succeed financially is if they win the lottery or inherit a large sum of money. However, wealthy people will tell you that there is no overnight formula for financial success.
Wealthy people know that money is a tool, but the most important tool you have is your mind. Building your skills and investing in yourself will also help in growing your wealth.
A lot of people get stuck between stages 2 and 3. You need to take each stage one at a time and focus on what you need to do to move forward. Hold yourself accountable for taking action.
Take a look at where you are at financially today. Then, write down the next 3-5 steps you need to complete over the next year. Afterward, get to work. When you realize that financial success is really just a bunch of baby steps, your goals become more realistic and achievable.
What are your next steps?
P.S. If you would like to take advantage of free stocks to add to your investment portfolio, read, “How to Get Free Stocks and Begin Investing Now.”
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