Whether you’re living to work, drowning in debt, struggling
to save, overspending, or existing from paycheck to paycheck, you’re all too
familiar with the invisible chains of financial stress. The answer, of course,
is financial freedom, but with so many bills and so little money left over at
the end of the month, how could anyone get from here to there?
Grant Sabatier — a self-made millionaire and golden child of
the FIRE movement — has created a roadmap that he says can bridge the gap
between financial servitude and financial independence. There are seven levels,
and if Sabatier is right that most Americans are already at the second level,
you only have six more rungs to climb.
Level 1: Clarity
Step one is to assess and clarify. It’s time to take
inventory of where you are financially and develop a clear picture of where
you’d like to be. That means checking your credit and revisiting your bank and
credit card accounts. You’ll also have to do the unpleasant job of gathering
your bills and tabulating your monthly expenses.
You do have to do it, but if you keep up with it after that,
you’ll only have to do it once.
“In order to take control of your finances during these
changing times, as well as get a hold of your spending and investments, it’s
important to create a financial plan,” said Radu Tyrsina, CEO and founder of
Windows Report and Reflector Media. “To successfully manage your financial
progress you need to be able to track your net worth, spending, and investments
in order to get a larger view of where you stand.”
Level 2: Self-Sufficiency
When you clear this level, you’re standing on your own two
feet. You’ve moved out of your parents’ house and you’re off any public
assistance you’d been relying on to get by.
It’s important to note that self-sufficiency and financial
independence are two different things. At level 2, you’ll probably be living
paycheck to paycheck, struggling with debt, or both, but you’re no longer
dependent. Although it might not feel like it, you’re finally in control of
your own destiny.
Level 3: Breathing Room
This level is where you break the cycle of
paycheck-to-paycheck living and all the anxiety that comes with it by finally
building up some savings.
“Having breathing room right now with inflation at a record
high in the past 41 years is imperative,” said Adrienne Taylor-Wells, an
accredited financial counselor with Tailored WealthSaver.
Level 4: Stability
If you reach level 4, you’ve made it — you are officially
financially stable. That means having six months’ worth of savings in the bank
and no toxic debt.
If you’re still living one paycheck away from disaster,
saving six months’ worth of expenses might feel like an impossible hill to
climb. The keys are consistency and patience.
“Automate your savings so that 10-20% of everything you earn
is automatically saved and invested,” said entrepreneur, author and financial
advisor David Delisle, who wrote The Golden Quest to get kids interested in
money. “This way you never see the money and don’t even miss it. The habit is
automatic.”
Level 5: Flexibility
Once you’ve established a healthy emergency fund, you’ll
divert some of your income to investments instead of savings. It works the same
way — by doing it slowly, steadily and automatically, a little will eventually
become a lot.
Over time you’ll reach level five. That’s when you have at
least two years’ worth of expenses banked, which gives you the flexibility to
take a year off of work if you choose to travel, spend more time with your
family or finally write that novel.
For Kris Fothergill, CPA and founder of the Diagno
accounting firm, flexibility meant buying a yacht and running his business from
the sea. It’s a dream worth working toward.
“Living on a boat has provided our family with many
unforgettable memories,” said Fothergill. “We have been blessed to surf
world-class waves, visit remote villages that are often unheard of, frolic in
crystal clear waters and explore some of the biggest cities in the world, all
from our humble floating home.”
Level 6: Financial Independence
This is the step where you get to quit your very last job
and live off the income that your investments generate, maybe from stock
dividends or rental income. If you make it here, you have achieved the holy
grail of personal finance — financial independence.
Real estate investor Brian Davis, founder of Spark Rental,
advises people to measure their progress to financial independence by tracking
their FI ratio.
“Your financial independence (FI) ratio is the percentage of
your living expenses that you can cover with passive income from investments,”
said Davis. “For example, if your monthly living expenses come to $4,000, and
you have $1,000 in average passive income each month, you have an FI ratio of
25%. When you reach 100%, you’ve reached financial independence. You can quit
your job and retire if you want. It’s the one financial goal that every adult
shares, but it also serves as a good measuring tool for financial benchmarks.”
Level 7: Abundant Wealth
This one’s simple — you’re rich. You can now eat at high-end
restaurants without looking at the right side of the menu and jet-set around
the world on a moment’s notice. You’re officially in the 1%. Enjoy it — and
reach down to help the lower 99 whenever you can.
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