7 Stages of Financial Freedom and How To Climb Each One
Written by
Ellie Diamond
Edited by
Cory Dudak
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
Financial freedom doesn’t happen overnight. According to bestselling author and finance expert Ramit Sethi, it’s a journey defined by seven clear stages. Whether you’re just starting out or planning for a rich life in retirement, you can learn to move forward with confidence.
From escaping paycheck-to-paycheck stress to building a lasting legacy, Sethi noted in a recent video that there are hurdles and priorities for each new tier of wealth attained. Get more insight into each level of financial freedom below.
1. Paycheck to Paycheck
At this initial stage, you lack enough income to cover expenses. This stage often forces people to take on high-interest debt, which adds to their costs and makes recovery even more difficult.
The priority at this stage, Sethi said, is to earn more. That might mean learning new skills, getting a second job, starting a side hustle or asking for a raise.
2. The Hamster Wheel
People at this level have enough to pay the bills, but there’s not much left over. Many have high-interest debt, and an unexpected expense can still leave them scrambling.
At this stage, the priority is to build an emergency fund and start paying down debt. Sethi recommended automating your savings and debt payments, especially if you’re unsure you can afford them. He believes there’s always an amount you can put aside, even if it’s $100 a month or less.
“You will not even know that it’s gone, but it will be silently building up in your emergency fund,” Sethi said.
3. Room to Breathe
At this third stage, you have enough income to cover your expenses with some left over. According to Sethi, this is the ideal stage to set up systems of building financial freedom. It’s also the time to start learning how to spend.
Sethi recommended creating a conscious spending plan that covers your expenses and sets aside money for savings and investments so you can spend guilt-free. His basic recommendation included:
- 50% to 60% for fixed costs
- 5% to 10% for investments
- 5% to 10% for savings
- 20% to 35% for spending
This plan teaches you that financial responsibility doesn’t mean postponing your life. In Sethi’s words, “The point is to live a rich life today and a richer life tomorrow.”
4. Freedom and Security
If you’ve reached this stage, you’re finally at a point where you can feel at ease about your finances. You don’t worry constantly about losing everything when something goes wrong. The goal is to strengthen that position, so you never worry about running out of money.
Sethi recommended, largely due to what he deemed “moronic tariffs,” having a year’s worth of living expenses in savings. If that’s not realistic for you, he advised starting with a month and working your way up.
He suggested keeping your savings in a high-yield savings account versus an investment portfolio. Investments may yield higher returns over the long term, but the risk is higher, according to U.S. Bank. Also, Sethi said, emergency funds are for when you need money right away, and investments tend to be less liquid.
5. Rich Life in Retirement
At this stage, your system is actively working to build your wealth for the future. Your savings and investments are accumulating, and you can start thinking longer-term. For many savers, that means retirement.
Sethi urged savers to get as specific as possible about what they want in the future and, more importantly, estimate how much that will cost. Once you know the dollar value of your goals, you can calculate how much you’ll need in your portfolio. He suggested starting with the 4% rule: You can withdraw 4% of your total investments each year of retirement, assuming a 30-year retirement. However, some experts, including the rule’s creator, believe the target should be closer to 4.7% in today’s economy.
As far as Sethi is concerned, your goals come first. Calculate how much you’ll need in the future, then determine how much you need to save per week, month and year.
6. Money Dial Optimization
Sethi defines a money dial as an area you love to spend on, such as food, travel or wellness. Once you reach this level of financial freedom and your future is on track, you can start turning up your personal dial.
Turning up your dial means spending more on experiences or belongings that matter to you. If you can use your money without compromising your future, you’re almost to true freedom.
7. Legacy and Giving
At this ultimate stage of freedom, your life is rich enough that you can consider your financial legacy. If you can give to others on a bigger scale, your money is truly free.
More From GOBankingRates
