The Financial Independence Ladder

There are multiple stages along the journey to financial independence (“FI”).  These have been detailed by several financial bloggers over the years and I want to provide my take on it here.  As you progress through the stages, your life and your feelings can change quite dramatically.  If you are currently at the early stages, don’t be discouraged by the road ahead.  As you move forward in the journey, your cash flow position will improve, your networth will increase, and the FI habits that you’ve built along the way will solidify – all making your goal feel and become more attainable.  Not everyone will reach financial independence in their 30’s and 40’s, that’s okay!  The key is that you want to take back control of your financial life and reduce the negative feelings and stress associated with being financially dependent on debt, other people, or your job.  Even moving a few rungs up the FI ladder can make a significant difference to the quality of your life and decrease your stress / anxiety / tension due to your financial situation.  Once you get on the right side of “zero networth” (positive networth) the momentum really starts to work in your favour!

The FI Ladder:

1) Financial Dependence

  • Financial situation
    • 0 or negative net worth
    • Not living within your means (likely spending more than you are earning and accumulating debt)
    • Potential cash flow / liquidity problems
    • Not intentional or thoughtful with financial decisions
    • No management system in place (tracking your finances, etc.)
    • No savings plan / goals
    • NEED HELP!
  • How you may feel
    • Out of control, trapped, insecurity
    • Overwhelmed, confused, frustrated
    • Worry, fear, guilt, shame
    • Unorganized

2) Solvency

  • Financial situation
    • Still 0 or negative net worth, BUT
    • Your debt level isn’t increasing monthly anymore – you have increased your income and/or decreased your expenses to the point where you are able to pay all of your bills for the month without having to rely on additional debt
    • Have started to get organized – tracking your finances
  • How you may feel
    • Relieved
    • Made it through the month
    • Although still worried about looming debt payments

3) Emergency fund 

  • Financial situation
    • 0 or negative net worth
    • You may still have debt, but your debt balance isn’t growing or even starting to decline!
    • As you pay down some of your debt and your interest payments decrease, you find that you may even have some amount left over from the month – freeing up a bit of cash that can serve as an “emergency fund” (money to cover expenses for 3-6 months).  This way, if you have an unexpected / emergency expense come up, you won’t have to rely on debt or a payday loan to cover.
    • Intentional with financial decisions
    • Developing a debt paydown or savings plan and long term goals
  • How you may feel
    • Good about having money left over from the month
    • More in control, secure – “things are starting to fall into place”
    • Confident – “I have a clear plan to pay down my debt, and it’s achievable”

4) Debt Free!

  • Financial situation
    •  0 or POSITIVE net worth
    •  Your debt is gone! Time to start thinking about having money work for you (Investing)
  • How you may feel
    • Sense of Accomplishment
    • Empowered
    • “I made it, I’ve turned around!”

5) FU Money

  • Financial situation
    • Networth of 1-5 years of living expenses
    • Start to see the benefits of saving to get to a positive net worth
    • Investment income starts to grow as your portfolio grows
  • How you may feel
    • In control
    • Free – “I am no longer beholden to others”
    • Flexible, confident
      • Not afraid to ask for what you want (e.g. time off, work from home, increased pay, getting rid of tasks you dislike)
      • You have flexibility to change your situation if need be (e.g. if you are doing work you don’t enjoy, have a team or boss you don’t like, or you are not being fairly compensated)

6) Coast FI

  • Financial situation
    • Networth of 10-15 years of living expenses
    • You have enough saved for retirement that if you were to stop saving today (only earn enough to cover your expenses), you would be financially independent by standard retirement age
    • Significant optionality emerges
      • Option to decrease to part time to provide more balance or take a lower paying job that you may enjoy more to cover your expenses
      • Option to take a mini-retirement (take a couple of years off?)
  • How you may feel
    • No worries!

7) Lean FI

  • Financial situation
    • Networth of 15-20 years of living expenses
    • Your investment income is able to cover your essential expenses (e.g. housing, transportation, food) but not discretionary expenses
  • How you may feel
    • My money is starting to work for me – “I don’t have to work my job for each dollar I get now”

8) Financial Independence!

  • Financial situation
    • Networth of 25-30 years of living expenses
    • Your investment income is able to cover all of your expenses (essential and discretionary) so you no longer need to rely on paid employment
    • Shift in focus to life’s true purpose since you no longer need to trade your time for money
  • How you may feel
    • Like a million bucks! (probably because you have a million bucks!)
    • “I’ve come a long way, and I made it”

9) Fat FI

  • Financial situation
    • Networth of 30+ years of living expenses
    • Your investment income covers your lifestyle expenses, and more!  The excess can be used to further increase your standard of living or give back (charity, etc.)
  • How you may feel
    • Like two million bucks (real feeling of abundance)