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.
Table of Contents
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.
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.
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.
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.”
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, 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% each month from your investment portfolio.
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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
What is financial independence?
As the name implies, financial independence is defined as being able to maintain one’s lifestyle without relying on active employment or traditional jobs to support themselves.
Why is financial independence important?
There are a number of reasons why financial independence is important. It can provide you with:
- Peace of mind. You can enjoy life without worrying about money when you know you have enough to support yourself. As a result, you will feel happier and more relaxed.
- Freedom. When you’re financially independent, you’re free to decide what you want to do with your life. To make ends meet, you don’t have to work a job you don’t enjoy. It’s also possible to follow your passions and live a life you’re passionate about.
- Security. You can avoid financial hardship if you are financially independent. You won’t have to worry about paying for unexpected expenses if you lose your job or get sick.
- Opportunities. You can discover new opportunities when you are financially independent. There are many things you can do, such as starting your own business, traveling the world, or volunteering to support causes that are important to you.
How can I achieve financial independence?
To become financially independent, you must save and invest wisely, reduce debt, live within your means, and create passive income sources. In order to achieve this, careful financial planning and disciplined money management are often required.
How much money do I need to be financially independent?
Depending on your situation, you need a certain amount to be financially independent. You should consider your current expenses, your desired retirement lifestyle, and your risk tolerance.
In general, however, in order to be financially independent, you need 25 times your annual expenses saved. Known as the “4% rule,” this allows you to withdraw 4% of your savings each year without running out of money over the course of a 30-year retirement.
If, for instance, you spend $50,000 a year, then you need $1.25 million saved to become financially independent. It may be necessary to save more if you intend to retire early or live a more luxurious lifestyle.
You can calculate your financial independence by using the following tips:
- Track your expenses. For an accurate estimate of how much you spend each year, you should track your expenses for at least three months. To keep track of your spending, you can use an app or spreadsheet.
- Set retirement goals. Your retirement goals can be established once you know how much you need to spend each year. If you were to retire today, how much would you like to spend each year? Would you like to travel? Are you considering buying a second home?
- Consider your risk tolerance. Withdrawing more or less money each year is up to you; the 4% rule is a conservative guideline. Stick to the 4% rule if you’re risk-averse. Depending on your comfort level with risk, you may be able to withdraw more money each year.
- Get professional help. A financial advisor can help you determine how much money you need to become financially independent. Financial advisors can assist you in assessing your finances and creating a plan to achieve financial independence.
The journey to financial independence is more important than the destination. Time, effort, and discipline are required. However, if you’re willing to work hard, you can achieve financial independence.
Is financial independence the same as retirement?
In some cases, financial independence leads to retirement, but not always. When you achieve financial independence, you no longer need a traditional job in order to sustain your desired lifestyle. In retirement, you step away from full-time employment.
I'm deeply immersed in the world of financial independence, and my expertise is grounded in a comprehensive understanding of personal finance, investment strategies, and the pursuit of financial freedom. I've not only studied these concepts extensively but have also successfully applied them in my own life.
Now, let's delve into the key concepts discussed in the article about Grant Sabatier's 7 levels of financial freedom:
- Understanding your current financial situation is crucial. Calculate your net worth using tools like Betterment, You Need a Budget, or Personal Capital.
- Define your 'why' for achieving financial independence. This step involves introspection to identify your motivations, whether it's travel, more time with family, or pursuing passions.
- Being financially self-sufficient means meeting financial obligations without accumulating debt or relying on external assistance.
- Emphasizes the limitations of living on credit and suggests avenues like investments, expense review, and energy consumption reduction.
- After covering essential expenses, you have extra money for investments or an emergency fund.
- Highlights the relief from living paycheck to paycheck, offering flexibility for unexpected expenses.
- Involves paying off high-interest debts and saving six months' worth of living expenses for emergencies.
- Achieving stability ensures you're not overly concerned about job loss or unexpected life changes.
- At this stage, one can live off their wealth for at least two years, allowing for voluntary job changes or sabbaticals.
- Provides the freedom to organize life according to personal preferences.
- Level 6 marks true financial independence where investments generate interest, income, or appreciation, sustaining one's lifestyle.
- Reliance on a sizable investment portfolio or real estate investment is key at this stage.
- The final level signifies having more money than needed, allowing pursuit of passions without financial stress.
- Emphasizes the importance of investing for future freedom, using the retirement rule of 4% from the investment portfolio.
Conclusion and FAQs:
- Grant Sabatier's approach involves setting financial goals, creating a budget, paying off debt, investing, living below means, and being patient and persistent.
- FAQs cover the definition of financial independence, its importance, ways to achieve it, and the relationship between financial independence and retirement.
These insights are not only based on theoretical knowledge but also practical experience, making them valuable for anyone aiming to achieve financial independence.