8 Levels Of Financial Freedom (2024)

When you read articles about financial freedom, you may hear people drone on and on about how they are spending practically nothing so they can retire at a younger age, like 30. Conversely, they may have already achieved financial freedom and are bragging about how frugal they were so they could retire well before the typical retirement age.

This is what I what I hear. Sell all your stuff, except for a tent, and move to the woods so you will never have to pay rent or utilities again. Joking aside, I actually come across a blog that promoted dumpster diving for food. No thank you! Realistically, most of us will not want to do the things required to retire at 30, 40 or 50. In fact, many people who are reading this likely are not saving enough to maintain their current standard of living during their golden years, if they retired at the age of 70. It pains me to report that about 21% of people have zero, zilch, nada saved for retirement, according to theNorthwestern Mutual's 2018 Planning & Progress Study.

Planning for retirement, or even financial freedom, is a marathon and not a sprint, as the saying goes. Breaking up your financial independence goals into small chunks can help keep you on track while making the process a bit more manageable and, hopefully, a little less stressful. Even if you are starting small, the important thing is to get started.

Here are the seven levels of financial freedom that you should work towards achieving.

Level 1: Not Living Paycheck to Paycheck

The first level of financial freedom is building up an emergency fund. Ideally, this will include paying off any credit card debt as well.

Unfortunately, living paycheck to paycheck is the reality of millions of Americans. According to the Federal Reserve's Report on the Economic Well-Being of U.S. Households in 2017, some 40% of households could not cover a $400 unexpected expense. Most of us will have some unexpected bills pop up throughout the year such as car repairs, medical bills and nights out drinking with friends. Having an emergency fund will come in handy during those types of situations.

Level 2: Enough Money to Quit your Job (for a bit)

Financial freedom is all about making work an option. Saving enough money to quit your job forever is a huge undertaking. Accumulating enough money to be able to take some time away from working is a big jump in that direction. This does not mean you have to quit your job, but it sure is a good feeling to know you can.

For extra credit you may want to save up for a sabbatical or extended vacation. I dream of spending a month, or two, in a foreign country each year. By no means will I be quitting my job, but it would take some planning in order to be away from my financial firm for that long.

In the shorter term, that extra money could also serve as your emergency fund. I mentioned that just in case some of you wanted some extra motivation to get to this level.

Level 3: Enough to be Financially Happy and still Save

This is a bit more about enjoying your life and having the money to do it. There is an immense sense of relief when you are earning enough to save, doing the things you enjoy and still having extra at the end of the month.

That extra cushion can be used to move up your financial freedom date. That of course assumes you avoid increasing your lifestyle and spending it.

Related: 5 Principles of Happy Money

Level 4: Freedom of Time

What many people desire is more flexibility with their schedules. Freedom of time and financial independence go hand in hand. Together, they are about leaving the rat race to follow your passion, or spend more time with family, and not going completely broke doing it. It could come in the form of more paid time off, flex time or perhaps working remotely on occasion. Not having to take a day off from work just so you can visit the dentist or take your kid to the doctor could be a huge benefit for some.

Level 5: Enough for a Basic Retirement

Do you know anyone who hates their job? I mean really hates it. I have met a few over the years as a financial planner. Those individuals were willing to do almost anything to retire as soon as possible. Some considered things like moving to a foreign country with a low cost of living, selling their home or getting roommates. I should point out that those people were closer to full retirement age.

For those of you looking to retire early with financial freedom, think about what your bare minimum retirement would look like. Could you move to a place with a lower cost of living? Would you give up going out to dinner? Work towards a nest egg that will support this bare-bones lifestyle. You probably will decide against moving to that cabin in the woods without running water, but it might be nice to know you could. Considering your bare minimum retirement, and knowing you have enough money saved to at least cover some standard of living in your early retirement, will also influence other life choices you may make along the way.

Would you lease a new luxury car if you knew it meant you would have to work a few more years? Downsizing your house might look more appealing if it meant you could retire now rather than in 10 years.

Level 6: Enough to Actually Retire Well

Assuming you are doing pretty well and are happy with your current standard of living, what would you need to maintain your standard of living in retirement? Knowing you are on track to accumulate a nest egg to support that lifestyle is a big win. Gold medals go to those who have accumulated enough assets, or passive income streams, to be in a position to retire well.

Related: 8 Questions to Help You Decide if You Should Move in Retirement

Level 7: Enough for Dream Retirement

If you did not spend 40, 60 or more hours per week at work, what would your dream life look like? Would it include things like traveling more and spending more time with friends and family? Traveling the world, flying first class, and staying in nice hotels does not come cheap. Think big here. What would really bring joy into your life.

How great would it feel knowing you are on track to have enough money to retire and be able to live your dream life? What is stopping you from getting there before you are 70 years old?

Level 8: More Money Than You Could Ever Spend

This is probably the most exclusive level of financial freedom. Hopefully, your financial freedom plan will allow you to outlive your money. Having more money than you expected to spend is great. Building enough wealth so that you could not possibly spend all of it is another. This group will likely be filled with people who either won the lottery, inherited a fortune or are founders of companies – think Bill Gates or Warren Buffet. Even if they went on a spending spree buying planes, yachts and automobiles; they would still have a hard time spending all of it. I should note that both Gates and Buffet have pledged to give away a vast majority of their wealth when they pass. I would be unfair to count that as “spending all their money.”

Take a look at where you think you fall on the aforementioned levels of financial freedom. Use it as motivation to keep moving towards your most important financial goals. While I love what I do, and plan to help people with financial planning forever, I take comfort knowing that it will be a choice to continue working in my golden years. Although I am still decades away from full retirement age, I am right between bare bones retirement, if I stayed in Los Angeles, and retiring comfortably if I was willing to leave California. Who knows what the future holds and how far up the chain of financial freedom my household will climb? Where are you at, and where do you want to be in five, 10 or 15 years?