The 7 Levels of Financial Independence
The 7 levels of financial independence (or freedom), is a widely referred to scale that helps people gauge the power of wealth. Some of the terms may be called something different as everyone has their own spin on it, but the general levels are fairly common across people in the personal finance space who refer to this.
Why are the 7 Levels so important?
All too often we may see a neighbor who buys a BMW sedan and say to ourselves, "Oh, they must be rich," when in reality that person may be living paycheck-to-paycheck. People's concept of rich vs. wealthy varies widely and is the subject of much controversy especially online where people like to put their material possessions on display. Using this framework helps everyone align to a common language of what "real money" actually is and what it can do for you. This is helpful when discussing your passive income journey with other like-minded individuals.
What is Realistic?
The goal is to get to at least Level 6 - Financial Independence. Depending on where you want to live and the hobbies you like to do, you may be able to get away with 1/4 of the amount of money we specify below.
- Level 7 is typically some combination of luck and fame and/or a head start from maybe an inheritance.
- Most people get stuck at Level 4 or Level 5 due to divorce, sickness, or some other life events which causes the assets to plateau.
- And... we don't ever, ever talk about Level 8
| Level (Phases) |
Description
|
|---|
| 1. Awareness |
- You have a good grasp of your income and expenses
- You have a general idea on what's your net worth
- You understand what savings rate is needed to achieve certain financial goals or pay off certain debts
|
| 2. Self-Sufficiency |
- You have steady income, typically from a job or businesses
- You do not need to borrow money from friends, family, or a bank for regular monthly expenses
- Probably still living paycheck-to-paycheck (which is fine, but not forever)
|
| 3. Disposal Income |
- You don't live paycheck-to-paycheck
- You are able to save money (outside of retirement account)
- You have $1,000 put away (e.g. Dave Ramsey steps)
|
| 4. Financial Security |
- You have no debt other than housing and maybe a car note
- Credit card bills are paid in full each month
- Your emergency fund to cover all household expenses (minimum 9 months, ideally 12 months) is fully funded
- Rule of Thumb: $80K-$500K USD annual income
|
| 5. Flexibility |
- You have the flexibility to leave your job without having another one lined up
- You could comfortably live for 2+ years off passive income and savings if you had to
- Rule of Thumb: $2-$3MM USD net worth
|
| 6. Financially Independent |
- Your assets make enough money to cover 100% of all your expenses
- Your assets can support your lifestyle until you pass away (i.e. age 95, you may adjust up or down)
- In a perfect scenario your assets are producing enough income where the value of the assets stay flat or keep increasing (e.g. the principal is not touched)
- Rule of Thumb: $5-$10MM USD net worth
|
| 7. Wealthy |
- You have abundant wealth
- Your assets produce enough passive income where your immediate family (and their families) will never have to work
- Rule of Thumb: $100MM USD net worth
|
| 8. FU Money |
- The amount of income produced each month is so high, you cannot spend the money fast enough, even buying ultra-luxury items (e.g. several private jets, mega yachts, luxury high-rise buildings)
- You're able to buy entire companies and still have enough money to remain at the FU Money level
- Your charitable donations are so high, buildings are named after you
- You have no fear and can say anything because it would be impossible for anyone or anything to take all your wealth in one lifetime
- There's a very high probability that you are divorced and/or have a few personality disorders
- Rule of Thumb: $100B USD net worth
|