7 levels of financial freedom

One of the leading voices and biggest success stories in the FIRE movement, short for “financial independence, early retirement,” Grant Sabatier has amassed enough money to live comfortably off his investment income.

Sabatier sees his situation as the ultimate goal for people who think about money like he does: not as something that allows you to buy things, but as a means to give you more choices about how you want to live.

“With every dollar you save, you give yourself more freedom and choices in life,” he said. “Based on how much you have saved and invested, ask yourself, ‘How many months of freedom have you gained?’”

Sabatier has spent life after 9-5 in what he calls “a mission-driven phase.” In his book “Financial Freedom,” Sabatier offers a roadmap to money security that includes seven levels of financial freedom.

Half of working Americans say they live paycheck to paycheck, according to a 2022 MagnifyMoney surveywhich places them at Level 2, self-sufficiency.

Progressing through the levels will likely require a change in your financial habits and general thinking about money, Sabatier says.

Sabatier’s 7 levels of financial freedom

Level 1: Clarity

The first step is to take stock of your financial situation: how much money you have, how much you owe, and what your goals are. “You can’t get where you want to go without knowing where you’re starting from,” says Sabatier.

Level 2: Self-sufficiency

Next, you’ll want to be standing on your own two feet, financially speaking. This means earning enough to cover your expenses without any outside help, like contributions from mom and dad.

At this level, Sabatier notes, you may be living paycheck to paycheck or taking out loans to make ends meet.

Level 3: Breathing room

People in Tier 3 have money left over after living expenses that they can put toward goals like building an emergency fund and investing for retirement.

Escaping Tier 2 means giving yourself some financial freedom, which Sabatier points out doesn’t necessarily mean earning a much higher salary. In fact, 31% of American workers making more than $100,000 live paycheck to paycheck, according to the MagnifyMoney survey.

Level 4: Stability

Those who reach Tier 4 have paid off high-interest rate debt, such as credit card debt, and saved six months of living expenses in an emergency fund. Accumulating emergency savings helps ensure that your finances are not thrown off course by unexpected circumstances.

“At this level, you’re not worried about losing your job or having to move to another city,” Sabatier says.

When calculating how much you’d need to have saved, think about what your financial picture might look like in an uncertain financial time, rather than just factoring in your regular day-to-day expenses, financial experts say.

“If you lose a job, you would make some changes. You would probably cut back on your gym membership and ditch your subscriptions, for example,” Christine Benz, director of personal finance and retirement planning at Morningstar, told Grow. “Think of the minimum you would need to survive.”

Level 5: Flexibility

People in Tier 5 have at least two years of living expenses saved. With that kind of savings, Sabatier suggests, you have the ability to think of your money in terms of the time it can buy you: “You could take a year off work if you wanted to.”

You don’t need to carry all this cash with you, Sabatier says: It could be a lump sum from your savings and investment accounts. As long as you can access that money somehow, if you need it, you have the flexibility to remove yourself, at least temporarily, from the workforce.

Level 6: Financial independence

People who have achieved financial independence can live solely on the income generated by their investments, according to Sabatier’s framework.

“You usually have one of two things,” says Sabatier. “Either you have a lot of money in an investment portfolio that is generating interest, or you have rental properties and the rental cash flow covers your living expenses, or a hybrid of the two.”

To get here, you will likely need to invest a high percentage of your income, which could require you to switch to a more modest lifestyle to drastically reduce your cost of living. Pursuing this lifestyle requires a change in thinking, Sabatier says.

Level 7: Abundant wealth

Financially independent people who live off their portfolio income often rely on the “4% rule,” a general retirement rule that an investor can safely withdraw 4%, adjusted for inflation, from a balanced portfolio. of stocks and bonds each year. and be relatively sure that the money will continue to grow and not run out.

Although economists debate whether 4% is the optimal number (some more conservative observers I think the correct figure might be closer to 3.3%), the calculation behind this serves as the basis for establishing a FIRE number: the amount of money you would need to retire and earn an annual income you could live on comfortably.

While those at Level 6 need to monitor changes in their portfolio to make sure their retirement continues to go as planned, those at Level 7 theoretically have no such concerns. “Level 7 is abundant wealth: having more money than you will ever need,” says Sabatier. “You don’t have to worry about money, and it’s not essential to your daily existence.”

The opinions expressed are general and may not be appropriate for all investors. Investing involves risk, including loss of principal. Carefully consider your financial situation, including investment objective, time horizon, risk tolerance and fees, before making any investment decisions.

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