When Sarah and I first started our financial turnaround, our long-term goals were clear.
First, we wanted to buy a decent house to raise our family in and do the best job we could raising our children with the values and skills needed to be independent.
After that, we wanted to achieve our own financial independence as a couple as rapidly as possible.
Over the last 12 years or so, since we reached that financial turnaround point, we’ve felt ourselves move through what I would describe as a series of “stages,” where our financial freedom and opportunity has notably expanded. While the line between each stage wasn’t incredibly stark and clear, there were times when it was clear to us that things were significantly different and significantly better than they were beforehand.
I’ve tossed this concept around in my head for years and this is my best attempt at really explaining those “stages.” I’ve concluded that there are roughly seven such stages, and the road to financial independence for most starts at stage one or stage two and goes to stage seven. I would put Sarah and myself at stage five and on the precipice of stage six.
At each of these stages, I offer a few suggestions for how to move up to the next stage. It’s worth noting that these strategies are foundational – strategies for lower stages continue to help you as you’re moving onward and upward, though some of the strategies for higher levels may not apply yet.
It’s worth noting that although some people might like to use the word “retirement” to describe some of the things going on here, I don’t particularly like that term. I prefer the term “financial independence,” which means that the financial imperative to continue to work is no longer present, though you may continue to work (and probably will do so) for other reasons.
One final thing: It is completely okay to be at any of these levels, and some people will want to stop progressing at particular levels and focus on other life goals. For me, I’ve found that the benefit of looking at things in this fashion helps me to draw some bigger patterns about my own financial journey and where I want to check out and start focusing on other life ambitions.
What do these levels look like? Let’s take a look.
Stage 1: Complete Financial Dependence on Others
This is a situation where your day to day life really only works through the direct financial assistance of people in your life. Without someone providing some of your basic needs for you (with no money or very little money in return), you would find it extremely difficult to survive.
Children are typically in this category. Adults who live with parents and enjoy lifestyle perks far above their income level are in this category, too. I’d put adults who financially rely on their parents or some other benevolent patron for day to day living to also be in this category. Many homeless people are in this category as well.
There are a lot of different reasons why adults find themselves in this category. There may be personality issues, psychological issues, disabilities, or reckless choices involved here. As a result, it is really hard to recommend specific steps to move away from this type of financial dependence.
My honest recommendation, if you find yourself here, is to ask for honest advice from a trusted source outside your dependence and trust that advice. Let that person see the reality of your life, listen to that person’s suggestions, and work to implement them.
It’s likely that the advice given to you will be painful advice and you won’t want to follow it. You might resent the advice giver or feel other negative emotions.
Don’t. Check those emotions. A person stepping in to give you advice at your request isn’t going to give you cruel advice. They’re going to give you accurate advice that might hurt but is intended to help.
Often, a key part of getting out of this state is finding some form of employment, even if you consider that employment “beneath” you. I know people who live with their parents and refuse to work because many jobs are “beneath” them, and that’s a mistake because they’re wasting years of their life without making financial progress or making themselves used to working every day (trust me, getting used to the realities of making money for yourself can be really hard, but for almost everyone, it needs to be done).
Another good strategy is to surround yourself with different people. We often resemble the average of the five people we spend the most time with, so if you’re spending most of your time alone or with people who seem to support you in staying put, find new people to associate with. This can be really hard if you’re dealing with psychological concerns, but figure it out. Get out of the house and start building relationships with people who have already achieved higher levels on this scale. Simply being around them will help you find your way up the scale.
There are plenty of ways to do that without spending. If you’re religious in any way, get involved with your local church. Try volunteering with a local charity. Check out what events are happening at the library. Check out what events are happening on . You don’t need to go to the bar or something like that to meet people – in fact, I’d actually recommend against it.
Stage 2: Financial Dependence on Debt
This is a situation where your day to day life really only works if there’s a constant availability of debt in your life. Most of the time, your bills overload your income and you’re only able to survive through a mix of loans – credit cards, car loans, a mortgage, payday loans, and so on.
Some American adults find themselves clearly in this category, either through lifestyle inflation far above their income level or a series of unfortunate events that lowered their income drastically without appropriate adjustments in lifestyle.
I would probably put Sarah and I in this category at our financial low point. We consistently spent above our income level for several years, which put us in a pretty rough financial state, with tens of thousands of dollars in consumer debt, tens of thousands of dollars in student loans each, car loans, and other debts on top of that. It wasn’t a pretty picture.
So, what can you do to break out of this situation? It’s important to note that these are foundational things – they’re things that you should be doing automatically at later stages in this progression.
First and foremost, you need to make some major lifestyle cuts. Your lifestyle has to be within the bounds of your paycheck – no ifs, ands, or buts about it. If you’re unwilling to do that, then you’re not breaking out of this state and you’re going to eventually fall off a financial cliff and find yourself forced to do so (while also being locked completely out of access to credit for a long while).
Sit down, look at how you’re spending money, and start cutting, starting with the things that are the least important in your life. Are you buying name brand things like ketchup and garbage bags? Switch to store brand. Are you eating out constantly and hitting bars and convenience stores? Cut back hard. Do you have a bunch of streaming services and a cable bill? Cut everything but one streaming service and then bounce from service to service in future months. Cut, cut, cut.
At the same time, start being more aggressive with how you make money. Start a side gig or get another part time job. If you have a main career path, sit down with your boss and talk about what you specifically need to do to take the next big step in your career (which means better pay).
Stage 3: Financial Dependence on the Paycheck
A lot of Americans find themselves here. This is “paycheck to paycheck” living, a state that a great many Americans find themselves in. According to some studies, find themselves at this level.
At this level, you can get by indefinitely as long as nothing significant changes in your life. You have to keep the job you’re working at and nothing significantly bad can happen in your life. No job loss without immediate unemployment. No serious illness. Even a major expense of some kind can knock some people back to stage two.
Sarah and I quickly got to this level once we took charge of our finances and axed a lot of spending. Our next step was to throw the kitchen sink at our debt, which, incidentally, is my first piece of advice to people at this level.
If you’re living paycheck to paycheck and you’ve already cut the low hanging fruit from your spending (from stage two), the next big step is to eliminate high-interest debt and take care of other low hanging fruit. You need to construct a debt snowball and start hammering away at it.
I’m a big fan of the advice of Dave Ramsey for people at this level (I think his advice for people at other levels tends to go awry).
The next thing you should do is build an emergency fund, meaning that you’re stashing away some money in a savings account somewhere to protect yourself from genuine emergencies. An emergency fund is what you tap when something bad happens, like a car breakdown or an emergency trip or, when it gets larger, a short-term job loss.
This isn’t meant to cover up personal financial errors (like forgetting bills or overspending on non-essentials), which are things that you should learn to manage without emergency money. Rather, it’s money for those genuine emergencies that you didn’t see coming that can disrupt things.
Along the way, you should automate some savings for the long term. Start by automating the emergency fund so that a small amount is deposited each week (your bank can probably do this, or you can open up a high-interest savings account online). You should also consider automating some retirement savings by signing up for a 401(k) at work or a Roth IRA at home, both of which are automatically funded.
Automatic savings takes the decision to save out of your hands – that decision is effectively made for you, so you don’t have to think about it. It just happens. You’re then left with paying your other bills and covering your other expenses out of what’s left. It’s the embodiment of the idea of “paying yourself first.”
Stage 4: Short-Term Financial Independence
At this level, you can survive for a while, up to a year or so, without income, but you’ll eventually need to return to work. You are protected from a lot of unfortunate life events, but that protection relies to an extent on continuing to work for a steady, healthy income.
After a few years, Sarah and I found ourselves at this level, a level that a lot of more affluent Americans, particularly those in their forties and fifties, find themselves eventually.
I found that the hallmark of this level is that one’s financial stress goes down significantly. Money worries tend to almost disappear at this level, leaving you with a sense that everything will be okay. At the same time, some degree of career stress still remains – although you know you could financially handle a career change, resetting without a real reason is probably not a good choice.
It was right on the cusp of this level that I switched careers myself, from working in a research lab to freelance writing. My reason for doing so was flexibility for our growing family (I spent a lot of time at home with the kids) and nurturing my writing gigs which I had cultivated in my spare time beforehand.
So, what can you do to keep moving toward the next level?
First, develop a clear written financial plan for getting there. This is the point at which a detailed financial plan becomes really helpful. Before this, financial planning is pretty straightforward – you’re mostly focused on getting out of debt and cutting spending. At this point, the focus starts to change toward lifelong goals and how to get there, and considering those issues and writing down what you want to do and how to get there becomes paramount.
A big part of that kind of financial planning is that you start authentically considering what your ideal life would look like, beyond mere daydreaming. It’s no longer daydreaming about winning the lottery, but realizing that you’re actually on a financial path that will result in the kind of life you want. But… what exactly is that kind of life you want? What do you really want to do with the rest of your life?
It’s a hard question, and you’ll find that the more you think about it, the more you tend to drift away from what your daydreams about winning the lottery looked like. Sarah and I used to dream of a big rambling home in the country with woodlands around us, but as we really thought about what we wanted once such things started to look as though they were possible, we realized that it didn’t actually capture what we wanted out of life.
For me, a key realization was that the things I wanted out of life largely didn’t cost very much, but that I deeply desired security around them and the freedom to spend as much time as I wanted on them. I really enjoy things like reading and writing and hiking and cooking and volunteering and tabletop gaming and learning new things, and none of those activities are particularly expensive. I can live a life I deeply value at a pretty low price, honestly.
For me, I found that developing a concrete plan that’s centered around what I actually wanted for my future motivated me strongly to save dramatically for deeper financial independence. Once I saw what I could actually have and how things were beginning to line up for it, I became extremely motivated to work for it and to give up accoutrements in my daily life.
Before this, frugality was just a tool to get my head above water and to kick off some of the shackles of debt. As I began to feel some freedom and really envision where I wanted to go, I began to see a lot of my spending as shackles, and frugality was about kicking them off. If I’m not spending money on something that’s either maintaining basic life requirements or bringing true lasting joy… why exactly am I spending that money at all? For me, it was this stage where that idea became clear.
Stage 5: Medium-Term Financial Independence
At this stage, you can survive for an indefinite period of time without work, but you can’t survive for the rest of your life without returning to a solid salary. Sarah and I are at this stage right now. Either one of us could probably walk away from our job for good, and both of us could do it for a while, but we still need some significant income over a significant period of time to be able to make it for the rest of our lives.
This stage brings a lot of flexibility with it. You’re basically protected from almost all smaller life emergencies. You can consider things like career changes and job changes without any real worry about the financial downside.
The first thing to do when you reach this stage is to consider whether your current career path or current job brings you genuine joy and meaning and, if not, make a change At this stage, there’s no reason to put up with a job or a career that brings you misery. What’s interesting is that a lot of the things that used to bring you misery when it comes to work fade away because you know you can just walk away from them if they become too egregious. It becomes much, much easier to stand up for yourself at work because the threat of repercussions or firing is pretty small.
For me, I found that this stage turned my professional life almost entirely into upside. If I don’t want to do something, I basically don’t have to do it. Instead, I focus on the things I want to do, that I really enjoy doing, and I produce enough value with those things that I can get paid reasonably well to do just those things. I have a ton of control over the projects I take on and the time I devote to them. I don’t really have to worry about aspects that I don’t enjoy.
Another key aspect here is to use your free time to experiment with your life to figure out what kind of life you desire in financial independence. Let’s say you reach a point where you don’t have to work for money in any way. How will you fill that time?
The thing is, all of the “I’d do nothing and read books and play video games” stuff burns itself out pretty quickly. What do you do then? What do you fill your life with that’s meaningful and cultivates happiness and further meaning?
There’s no consistent answer for everyone. The key is finding your own answer, and at this stage, you have the financial leeway to discover it for yourself. I will suggest that for many people – myself included – those answers involve good use of time and focus rather than using money. It’s not found in endless luxury.
Finally, automate, and be patient. Your finances at this point should be pretty much on autopilot, taking you straight to a state of complete financial independence if you don’t change anything significant about your life. Much of this stage is truly about patience, as things are in place for you to reach your goals if you just wait it out. Without a disaster or a major life change, you will reach further stages, but you just have to be patient through a period where it feels like things aren’t changing.
Patience is hard, trust me. I feel it all the time. That’s why it’s good to occupy your mind with finding genuine meaning in other aspects of your life so that you’re not tempted to jump off the path.
Stage 6: Partial Financial Independence (‘Barista FI’)
At this point, you can survive for the rest of your life by doing something that seems enjoyable that earns at least some income at least some of the time, and you can probably make it for the rest of your life if you cut back on your current spending. Some retirement age Americans are here. Sarah and I aim to be here somewhere in our late forties.
If you’re here, you should step away from any work that isn’t joyful and meaningful for you, and seek out only work that makes you feel that way This was an option at the previous stage, but here, it’s pretty much a given. You have no reason to do work that isn’t providing some sort of significant value or meaning in your life beyond simply receiving income.
This might mean staying in your current career path, or it might mean something different. If you get a lot of meaning and value out of your current work, keep doing it. If you get meaning and value out of it but you’re sometimes overloaded, look at cutting back on your responsibilities a little, even if it means less pay. If you’re not getting meaning and value, find something else to do, like working for a charity or switching to a more altruistic job.
While you’re in this stage, aim to live as much as possible on your income so that your investments can grow unfettered. If you’re doing meaningful work, aim to live as much as possible on your income from that work. Yes, you might have to supplement from your investments, but the less you do that, the better. You’re close to being able to remove the need for income entirely from your life.
Sarah and I have already discussed what we’ll do at this point. Sarah loves to teach – it brings deep meaning into her life – and she’s going to consider where she can teach where she can make the greatest impact and likely switch to that teaching situation. For me, I’m going to stop taking on any writing gigs that don’t leave me with a strong sense of being meaningful or valuable for me or ones that eat up too much of my time.
Stage 7: Full Financial Independence or Early Retirement
At this stage, you never have to work for income again, though you may choose to work for non-financial reasons. Some retirement-age Americans are here, and Sarah and I hope to be there in our mid-fifties when our children are completely out of the house.
Many people look at this state as being “retirement.” I look at this state as being “freedom.” It doesn’t mean that you sit down and idle for the rest of your life. It means that you have the freedom to fill every hour based on what’s actually meaningful, not in terms of what you need to do to make money and maintain your basic life requirements.
So, what do you do at this stage?
First of all, don’t idle. Fill your days with lots of meaningful, worthwhile things. Build new skills that you really care about. Read challenging books. Go on long hikes. Volunteer. Stuff your calendar full of things that are really important to you.
Idling is something we do when we’re worn out or are procrastinating. If you’re worn out, get genuine rest. If you’re procrastinating… why on earth are you procrastinating at this stage in your life? You shouldn’t have to do hardly anything that you don’t genuinely want to do.
Don’t idle. Don’t sit in your easy chair. Live life.
At the same time, take care to not let your spending inflate, and create caps for yourself. One good strategy is to simply set a withdrawal rate from your investments. Each month, withdraw something like 0.2% of your investment balance and live on that for the month. If you do that, you can live in perpetuity, and you’ll find that the amount you’re able to withdraw slowly grows.
You should still keep building things like an emergency fund and so on. Your goal should be to live on that 0.2% a month in every way, so that you never have to touch the balance of your investments. If that 0.2% allows you to inflate your lifestyle a bit, so be it, but focus on doing meaningful things, not just spending for spending’s sake.
You could obviously add a “stage eight” that centers around more wealth than you will ever need or that your children will ever need, but I see no real reason to do so.
The key thing to remember here is that this is a journey, one that’s fluid and a little different for everyone, and different people may be motivated in different ways by it. Some people might be happy where they’re at and this is irrelevant. Some people at level one or two might be content to get to level three and then focus on other life issues. Some people may aim for a particular stage and then, later on, change their life goals and start focusing on other things. You aren’t a “winner” if you made it to level six or seven. It’s just a way of evaluating one single aspect of your life – financial – and you may find it better for you to focus on the many other spheres in your life when you’re at a good financial point for you, even if it’s not a top level or even if it’s a pretty low one.
For me, the most valuable thing I’ve found in moving through these stages is that each stage has meant overall lower life stress and more time and focus on activities that really matter to me and aren’t just done to “escape” or to keep up with the Joneses. It has felt like a journey toward a more meaningful life, not just a journey to financial independence.
Also, while this whole thing has been a spectrum, each stage has felt noticeably different for me than the others. I can tell, just by reading old journal entries, when exactly I was in each stage of this journey, and I can see a couple of clear dividing lines up ahead of me when I reflect on where I’m headed.
Whatever you choose to do with these ideas, may it take you to a better place in your life. Good luck.
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