If you want to achieve financial abundance from financial dependence, you need to study different levels of financial independence. The best levels of financial independence are defined by Financial Independence, Retire Early (FIRE) Movement. Let’s dive deep to find out how FIRE Movement can help you transform your life.
What is financial independence?
Financial independence or financial freedom refers to a particular situation where you don’t need to work like a machine. In fact, you don’t need to work at all unless you want to after achieving financial independence. However, it is a concept that may mean different things to different people. There are also different ways to achieve it.
FIRE Movement’s different levels of financial independence
Different people may consider financial independence differently and there may be different ways to achieve it. However, FIRE Movement’s different levels of independence make your journey from financial dependence to financial independence seamlessly easy. There are 10 levels of FIRE Movement that you can follow.
0. Financial dependence
Financial dependence is the first of 10 levels of financial independence. All human beings start from this level after opening their eyes to this world. It means everyone at this stage has to depend on someone to cover his/her living expenses. For example, a child depends on his parents to meet their expenses. Similarly, people depending on government funds to meet their living expenses are also at this stage. This is because they depend on monthly payments as they don’t earn or don’t earn enough to cover their expenses. In short, the financial dependence stage is level 0 where someone totally depends financially on someone else.
1. Financial solvency
Moving to financial solvency from financial dependence means earning enough money to meet the cost of living. At this stage, people earn enough money to cover their kitchen expenses and all other expenses. However, people at this stage are hardly able to meet their expenses and can save nothing.
2. Financial stability
Financial stability is a stage in levels of financial independence where you start saving money. People at this stage earn enough money that covers their expenses quite easily and they are also able to save. However, it is important to note that it is cash savings that you can utilize in case of any financial emergency. For example, you don’t have to borrow to fix your car or pay hospital bills.
3. Freedom from debt
You achieve level three when you achieve freedom from debt. For example, if you don’t have to pay any outstanding debt, you are at this stage. That means you are getting closer to financial freedom.
4. Coasting financial independence
Coasting financial independence means you are moving at quite a pace to financial freedom. It is a level where you don’t need to do a job you no longer want to do. That means you have a significant amount in your account or have other assets as your source of income. You have a lot of choices at this level of financial independence. For example, you can go on for early retirement because you are no longer depending on a difficult job you don’t enjoy.
5. Financial security
Financial security is a level among levels of financial independence where you have financial security through your investments or any other source of income. This level is achieved when your monthly cash flow from other sources can easily replace your monthly paycheck. Reaching this level is a huge milestone. However, there is a lot more to achieve for financial independence. Your income at this level is just enough to cover your cost of living without grinding at a job you don’t enjoy.
6. Financial flexibility
Financial flexibility is a level that may or may not be financial freedom for you. That means you are earning enough money but don’t have a significant margin of safety. You will be financially independent if you are flexible with your spending. Contrarily, you will not be financially free if you aren’t flexible with your spending habits. For instance, if you are stock trading and the stock market is down, you will have to spend less. Conversely, you can spend as much as you want when the stock market gets back to its best. However, this situation is quite uncomfortable for most people and they need to have a substantial margin of safety.
7. Financial independence
Financial independence means you have 25 times more saved in your account than your annual income. Thus, you can withdraw the amount to cover living expenses. This stage is the level among levels of financial independence where you are stress-free as far as finance is concerned.
8. Financial freedom
Financial freedom is a stage where you have enough money to enjoy your life in the way you want. That means your cash flow not only can cover your living expenses but also enables you to fulfill your desires. Thus you can do things you have always wanted to do in the past but couldn’t because of financial difficulties. For example, you can easily buy a dream car or a dream house at this stage.
9. Financial abundance
The last level of the 10 levels of financial independence is financial abundance. You have a lot of wealth at this stage and can do whatever you want. Reaching this level means you have enough money that can easily last for your life even when you quit working. But how can you quantify the numbers required for financial abundance? One way is to multiply 3 by your financial independence number. The number will be different for different people, you will have a rough idea about whether you have achieved financial abundance or not.