Several years ago, I read a book that changed my entire view on personal finance and the way I look at money. That book is Financial Freedom.
Financial Freedom is an international best-seller written by Grant Sabatier, owner of the blog Millennial Money. He speaks about how he had less than $3 in the bank when he finally realized he had to get his life together.
Five years later, Grant was a millionaire after hustling every which way that he could. He's still quite successful today, and I tout on Twitter about how his book changed my life.
You can find Grant's blog, Millennial Money, here.
An important concept of his book is the 7 steps to financial independence. Here's the thing. We're all on different steps.
We want to get to the 7th step at some point in our life or at least the 6th step. That's the ultimate goal, and I will go into each step below and describe them in detail – what they are and how they benefit you.
7 Steps to Financial Independence
With each stage of financial independence, you get closer and closer to living life more comfortably. Upon reaching the 6th step, you have the ability to retire, and for those who move on to the 7th step, you will live your life without limits.
Let's talk about each stage and how it affects your journey to financial independence.
Step 1: Clarity
Step 1 is when you figure out where you are and where you want to go. At this point, your finances may be a mess, or you may not be able to cover your bills or you may have no income. Things are hectic.
You have dreams, but you may have limited direction or means to obtain your dreams. If you are in this step, you have realized that it's time to develop better money habits. You're looking to get on the path to financial freedom because you know that financial freedom is worth it.
This is a great time to pick up a book such as I Will Teach You To Be Rich by Ramit Sethi, in which you'll learn amazing ways to get your money in order. His book was one of a few that helped me set financial freedom goals.
Step 2: Self-Sufficiency
Step 2 is when you earn enough money to cover your expenses on your own. At this point, you are living paycheck to paycheck, but you are getting by.
You have no one helping you, but you have nothing or almost nothing left at the end of the month. This can feel frustrating because you are grinding away and not necessarily getting anywhere.
During this time, you are paying down debt and looking for ways to cut back and save. Creating a budget during Step 2 will do wonders. Check out these financial freedom resources where I talk about budgeting and expense tracking, how to drastically lower your expenses and how to stop living paycheck to paycheck.
Step 3: Breathing Room
Step 3 is when you escape living paycheck to paycheck. This is an amazing feeling where you can now start saving money. You are through arguably the toughest stages of financial freedom because now you have money left to save each month.
When you reach Step 3, you can start an emergency fund beyond $1,000 and perhaps start investing for retirement. Vacations become a possibility as do more leisurely spending. You're starting to see the benefits of financial independence as you continue to work your way through the stages.
If you make it to step 3, you are no longer one of 78% of Americans who live paycheck to paycheck (if you're American, that is!)
To begin saving up, check out my guide on emergency funds. If you don't have a savings account to store an emergency fund, I highly recommend CIT Bank. They offer a competitive APY so you can earn money on your money. I've used CIT Bank for years, and their online savings account is the perfect place to start saving.
Step 4: Stability
Step 4 is when you have six months of living expenses saved and bad debt like credit card debt and student loans repaid. When you get to Step 4, you have opened the path to true financial security.
Having six months of living expenses saved up and bad debt gone means if a financial hardship hits you, you will likely be able to take care of it with minimal issue. Here's my guide on mitigating a financial hardship.
Getting to Step 4 can be quite difficult, taking many months or years, depending on your financial situation. But, when you get to Step 4, rest assured, you are doing fantastic!
While you don't have true financial freedom yet, you're getting close. You may be preparing for a financial freedom lifestyle as you get through this step and on to step 5. Let's talk about step 5.
Step 5: Flexibility
Step 5 is when you have at least two years of living expenses invested. Step 5 is a real turning point. You have extra money at your disposal, and you're investing in the long term.
If your average monthly living expenses are $3,000, then Step 5 means you have $18,000 saved in an emergency fund and $72,000 invested in the market or through other means such as real estate, P2P lending, etc.
You're almost to Step 6, which means you're almost there. At Step 5, you can do most things that you want. You might take a regular vacation, buy a nice car, or move into a new home.
A great place to invest for your future is through M1 Finance. With easy to use tools and the ability to do automated investing, M1 Finance can get you started on a path to a healthy retirement nest egg.
Are you interested in investing in P2P lending? I wrote up a Lending Club review, where I earn over an 8% annualized return and get weekly passive income. If this interests you, you can check out my book on Lending Club, where I share my exact winning strategy.
Step 6: Financial Independence
Step 6 is when you can live off the income generated by your investments forever, so work becomes optional. You have achieved financial freedom! Investments generating income could include rental properties, dividend funds, business income, P2P lending, and more.
This is arguably the end game for most people. Once you get here, you can effectively retire, so make sure your retirement planning is sufficient.
How much money do you need for financial freedom? That's up to you. If you can generate enough passive income so that you're living comfortably and can cover any emergency, then you have enough money to be financially free. For me and my wife, we would like to have passive income ranging between $60,000 per year and $90,000 per year to say that we're truly financially free. That would be our definition of true financial freedom.
You're done. You've reached financial freedom and possibly early retirement. Excellent job. But some people will take things a step further and attempt and make it to Step 7.
Step 7: Abundant Wealth
Step 7 is when you have more money than you'll ever need. At Step 7, you are able to donate money to your favorite causes, to your family, to anyone.
You can go anywhere and do anything. You have no limits. Your net worth is likely many millions.
For some people, this is more money than others, as abundant wealth directly relates to your lifestyle choices and income.
Further Analysis of Obtaining Financial Freedom
And that's the 7 steps. Where are you? Where do you see yourself in 5 years? 10 years?
Personally, I'm somewhere between Step 4 and Step 5. My wife and I have nearly six months of living expenses saved on top of a few months of living expenses invested. We have been in the Step 4 to Step 5 limbo for years, so as you might imagine, reaching each Step is incrementally harder than the previous.
Three ways to work your ways up the 7 steps of financial freedom are to live far below your means, increase your savings rate, and increase your income. These all work together.
What is the Importance of Financial Freedom?
Being financially free is important because you're no longer worried about where your money is coming from. You aren't required to work and you and your family are able to do what they want as they want to do it.
Financial freedom also protects you from hardship. When you have enough income coming in to cover your life, you don't have to worry about things going wrong. A sudden medical expense won't set you back. Your car breaking down won't crush your budget.
How Can I Get to Financial Freedom in 10 Years?
To get to financial freedom in 10 years, you'll have to hustle your head off and minimize your living expenses. That means working multiple jobs and not spending money. You may have to share living space with someone else and spend all of your money on paying down debt or investing.
You want to build up as much wealth as you can, as quickly as possible. This means buying into investment funds that grow and pay out regularly. An example of this would be a healthy mix between index funds and dividend paying stocks.
When you mix crushing your debt with investing all of your money to earn higher income, along with working multiple hustles, you can go from 0 to financial freedom in 10 years or less.
Wrapping It Up
Regardless of what step of financial freedom you're on and how quickly or slowly you're progressing, the important thing is to stick to it. It's fully possible to fall back a step or two. I know I have at times.
Where are you on the 7 steps of financial freedom?